Credit insurance meets trade finance: A smarter way to risk
In an economic and political environment where multinationals face rapidly increasing risk and volatility, trade credit insurance has a vital role to play. Insurance that supports organizations when customers fail to pay what they owe provides crucial risk management benefits. It safeguards cash flow and ultimately protects multinationals from what can be an existential threat.
However, there is a problem. Many multinationals are finding it difficult to optimize the value of trade credit insurance policies in a complex marketplace. A range of challenges, which drive up costs and require burdensome administration, are undermining the utility of insurance. Some organizations are therefore under-insuring. Many others are choosing to steer clear of trade credit altogether. That’s frustrating. The arguments for trade credit insurance are more powerful than ever in the current business landscape, with sources of disruption ranging from the rise of protectionism to the artificial intelligence revolution. Multinationals can still afford a spike in bad debt, but today’s uncertainties – from rising geopolitical tensions to economic upheaval – threaten exactly that.
Many organizations are therefore looking for new ways to navigate the trade credit maze. And the good news for both multinationals struggling to optimize cover and those that have avoided this insurance to date is that simpler and more effective trade credit policies are within reach.
The first step in that search is to get to grips with the problems posed by existing trade credit arrangements. Importantly, the issue doesn’t lie with the nature of trade credit insurance itself; rather, the difficulties stem from the way the trade credit market has evolved over time.
In particular, multinationals have often built up portfolios of policies, buying cover for each local market in which they operate, rather than arranging insurance at a regional or global level. They deal with brokers and insurers at a local level, with these firms having no access to the broader profile of the business.
One negative consequence of this approach is the operational burden to which it gives rise. Managing multiple local policies requires significant administrative effort, increasing both internal and external costs across the business as a whole. Such costs may not be immediately visible to local subsidiaries but will be considerable at the group level.
A related problem is that insurers struggle to offer bespoke, tailored trade credit cover when working with customers in this way. For example, they are unable to offer terms that reflect the true risk profile of a large multinational organization, which can often be considerably lower than what local subsidiary arrangements might indicate.
Indeed, many of these local policies are arranged as 'whole turnover' coverage. That is, they protect the policyholder from the first euro, pound or dollar of loss onwards – even where a multinational has sufficient balance sheet strength to absorb smaller bad debts reasonably comfortably. In effect, multinationals are paying for more cover than they need.
Addressing these issues can also be challenging for multinationals. The complexity of unwinding multiple local policies acts as a disincentive to switching to potentially superior arrangements. In fact, the risk of becoming entrenched in this scenario dissuades many multinationals from obtaining cover. Concerns about the cost and bureaucracy associated with managing such arrangements have led some to forgo trade credit insurance altogether.
How can multinationals overcome these challenges to secure effective trade credit insurance without high costs and complexity?
A different approach can offer significant benefits. Companies with strong balance sheets can retain more risk, aligning credit insurance with their financial strength. Quality insurance can also enhance financing options by ensuring accounts receivables are valuable collateral.
It's not an all-or-nothing choice; companies can seek coverage for specific markets and exposures as needed. Moreover, integrating technology with a trade credit insurance program allows better data use at regional or global levels, maximizing policy effectiveness.
The WTW Trade Credit Multinational Team is a highly-skilled and globally experienced group of trade credit insurance brokers with a client centric service model. This team, comprising specialists with a background in broking, credit risk analytics and underwriting, makes use of bespoke data and analytics tools, artificial intelligence-driven processes and WTW’s extensive network of more than 200 trade credit and political risk insurance professionals.
The team’s goal is to deliver more efficient, streamlined, and cost-effective insurance programs for multinational clients, leveraging data and analytics to structure cover in the optimal way. It can help multinationals secure much greater value by implementing a trade credit insurance policy or optimizing it through the use of data and analytics. The result is a leaner and more cost-effective trade credit insurance program.
For smarter ways to manage your credit risk, please contact our team.
