Trade Credit Insurance; why it is important for your corporates

For many companies, trade receivables may be their biggest economic asset. If they are unable to collect on these receivables and their income stream is disrupted for an extended period or permanently, the business may not survive. So what to do as a business leader, CFO or risk manager? Self-insure? Look for factoring opportunities? Explore the complex world of Account Receivable Puts with an investment bank?

Fortunately, there is an alternative, via a straightforward insurance solution that can allow business leaders and risk managers to continue to sleep soundly despite these risks:trade receivable insurance. Tade Credit Insurance provides protection against nonpayment by customers on receivables that they owe. There can, of course, be many reasons a customer may become unable to pay what they owe, and many of these, such as access to working capital, inventory turnover, and price trends, may be readily assessed and monitored.  Trade receivable insurance, with its comprehensive cover and limited exclusions can respond to situations such as political risks hindering payment of invoices.

Here’s how the coverage typically works: XYZ Company, a Nairobi-based trading company, buys a trade receivable insurance policy to protect against nonpayment from its customers. Those customers can be in its domestic market or in developed or emerging export markets, as the coverage is comprehensive and triggered by nonpayment, not a specific country location or underlying event. XYZ agrees, subsequent to negotiation with its insurance partner, to take a $5 million deductible and purchases up to $100 million in coverage above that, with specific (and non-cancellable) credit limits provided on its key accounts – for example $10 million on each of its top ten (10 buyers) buyers – and a “discretionary” limit – perhaps $1 million, also negotiated with the insurer -- allowing it to continue to make its own credit decisions on smaller accounts. Policy periods are generally for one year.

Suppose one of XYZ’s key customers and ten of its smaller buyers are based in a country where a government change results in international sanctions, and businesses in the country are no longer able to sell their products to their key customers. As a result, the customers become unable to pay XYZ, with the large customer owing $10 million and the smaller buyers $1 million each, resulting in a loss of $20 million in receivables. Such a loss would trigger the trade receivable insurance which would cover 90% of the loss amount in excess of the deductible.

Besides the obvious economic benefits when a claim occurs, trade receivable insurance offers advantages including:

1. Flexible and cost-effective credit risk mitigation.
2. Support for favorable sales terms and financing for key accounts.
3. Help in penetrating new markets.
4. Enhancement of counterparty credit monitoring.

So at its best, trade receivable insurance not only provides XYZ potentially enterprise-saving protection in the event of an unexpected loss, but also an insurance partner that is there to help the company confidently grow its business in developing countries, extend favorable credit terms to retain key accounts or attract new customers.

Providing trade receivable insurance at its best requires a partner such as Underwriting Africa that can offer analytic rigor, deep technical knowledge and outstanding service. 

So if you want to sleep a little easier in a world of constant volatility and ever-changing risk, you may want to explore trade receivable insurance. It’s a tried and true solution that continues to offer great value.