The recent updates in the food and drink market, particularly concerning trade credit insurance, highlight significant trends and challenges that businesses face globally. With a notable increase in global insolvencies, as reported by Allianz Trade, businesses are experiencing a 30%+ increase in insolvencies in major economies including the U.S., Canada, France, and Japan, among others. This trend is expected to continue, with a predicted 10% increase in 2024, marking a 15-year high and the fourth consecutive year of increased business insolvencies. This situation underscores the critical role of trade credit insurance in managing financial risks.
The food and drink sector, despite these challenges, continues to attract trade credit insurers, especially in areas where businesses can pass on the costs of inflation, higher interest rates, and energy price volatility to customers. However, capacity issues are becoming more pronounced in heavily insured segments like wholesalers and grocers, indicating potential challenges ahead.
Trade credit insurance policies are evolving to meet these challenges. Policies that offer non-cancellable credit limits and greater policyholder discretion, such as excess of loss solutions, are gaining popularity. This discretion allows them to approve credit limits on customers, at pre-set parameters within the policy, without needing to get approval from the insurer. These policies help cover gaps that might occur due to new business acquisitions or inflation-driven increases. The market for top-up providers, who offer additional coverage for existing policies, is also seeing significant growth. Top-up trade credit insurance extends your existing credit insurance policy by adding higher limits and allows you to exceed the limits given by your existing trade credit insurer.
Moreover, the strategic use of trade credit insurance as a growth tool is becoming increasingly recognized. Businesses are leveraging this insurance to gain a competitive edge, allowing them to expand into new markets and sectors with reduced financial risk. Additionally, trade credit insurance is facilitating improved funding terms by securing a company’s trade receivables, which is particularly appealing to banks and financial institutions.
The role of trade credit insurance extends beyond risk management to include support for supply chain finance programs. These programs, which are expected to grow in popularity, offer early settlement options that are based on the financial strength of the purchasing company rather than the supplier. This arrangement can provide suppliers with better terms than they might otherwise obtain, enhancing the overall efficiency of the supply chain.
In the context of the food sector, in a recent WTW podcast the CFO of Lincoln Provision highlighted the indispensable role of trade credit insurance in managing credit risk and ensuring financial stability. The food industry, characterized by high credit risk and tight margins, relies heavily on trade credit insurance to mitigate potential losses from customer insolvency or non-payment. This insurance is crucial not only for managing receivables but also as a tool for informed credit decision-making, providing insights into the creditworthiness of new customers.
Trade credit insurance is particularly vital for businesses dealing with international customers, where assessing credit risk can be challenging due to limited information and complex ownership structures. The insurance acts as a safety net, protecting businesses from losses in unfamiliar markets and helping them navigate the complexities of international trade.
Furthermore, trade credit insurance supports financing activities by making international receivables eligible for advance within lending programs. Some banks may even require such insurance on international receivables as a condition for financing, enhancing the financial flexibility of businesses and facilitating access to working capital.
The ability of trade credit insurance to increase sales and manage capacity is another significant benefit. It provides businesses the confidence to extend credit to new customers and pursue larger sales volumes without compromising their risk exposure. Additionally, the flexibility to adjust credit limits or obtain additional coverage supports businesses in capturing growth opportunities and expanding their market share.
Collection services included in trade credit insurance policies also play a crucial role. These services help businesses recover outstanding debts before resorting to filing a claim, reducing the financial impact of non-payment.
Trade credit insurance remains a vital risk management tool for businesses, particularly in the food sector. It not only serves as a safety net against potential losses due to customer insolvency or non-payment but also facilitates credit management, financing activities, and capacity management. Regardless of the business cycle, whether in recessionary environments or periods of economic growth, trade credit insurance provides businesses with the necessary protection and confidence to focus on growth and financial stability.
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