Accounts receivable insurance or trade credit insurance is gaining increasing importance as global challenges, which began in 2020 with the COVID pandemic and have continued to this day as a “permacrisis”, make doing business on the local and international market more demanding. The current period is marked primarily by globally high inflation rates, unstable energy prices, rising labour costs, reduced demand and various other factors that greatly affect the general business environment.
One of the consequences of the influence of the above factors is the constant growth and increasingly pronounced delays in payment or difficult collection of receivables. Insufficient income and inflows caused by rising prices and falling demand due to decreased purchasing power and reductions characteristic of crisis periods with rising costs generate additional debts, and their settlement becomes nearly impossible. From the seller’s point of view, this is identified as an account receivable with no prospect of collection, which, if occurring frequently, can easily transform into chain insolvency.
One of the solutions for the increasingly pronounced delay in debt settlement or receivables collection is to increase income and inflows by modifying the business model and finding adequate, liquid partners. However, it is a process whose duration may exceed the company’s working capital reserves. Another adequate solution is contracting trade credit insurance.
Trade credit insurance (trade finance insurance) provides coverage for receivables against unexpected commercial risks such as a customer’s bankruptcy or insolvency, or political risks, such as changes in import and export regulations, which lead to non-payment or late payment by customers. Trade finance insurance allows the insured person to secure their cash flow without resorting to traditional solutions such as liquidity credit, the approval and activation of which can be complex and time-consuming and almost always come with a high price.
What does trade finance insurance cover?
Trade finance insurance provides coverage to companies if their customers, who owe money for products or services, do not settle their debts or pay debts within the deadlines defined by the payment terms. Trade credit insurance essentially covers two groups of risks:
- Commercial risks – when the policyholder's clients are unable to pay outstanding invoices due to financial difficulties (e.g., insolvency or bankruptcy);
- • Political risks – non-payment as a result of events beyond the control of the policyholder or their client. Policies may include coverage for damages resulting from: political events (wars, revolutions); natural disasters (earthquakes, hurricanes); economic difficulties in the buyer's country (lack of currency or inability to transfer money owed from one country to another), embargo, confiscation of goods by the country, etc.
Process of Contracting Trade Credit Insurance
As part of the policy, the trade credit insurer will review and analyze the business of the clients or the customers of the policyholder, assigning each of them a credit limit amount up to which the insurer will protect the insured in case such customer does not make payment for goods or services.
The analysis of the insured person’s customers is a key element of the process, which requires a high level of expertise on the part of the insurer or broker, and is carried out using and cross-referencing data from various sources:
- Official financial reports
- Information provided by other insured persons who sell goods or services to the same customer
- Public records
- Visit to the client (insured) and direct inspection of their business
The insurance company’s analysis or “due diligence” of the policyholder’s customers, in addition to enabling the conclusion of trade finance insurance, also brings added value to the client by allowing them to gain insight into the business of potential and actual clients in other markets, about which they don’t have adequate knowledge.
Since EuroSolutions provides accounts receivable insurance through ICBA (International Credit Brokers Alliance), it also comes with free access to a wide information network on a global level, which, besides providing information about customers from foreign markets, also acts as an effective early warning mechanism for unfavourable economic conditions or unfavourable customer performance in such markets. Meanwhile, the relationship between the insurer and the policyholder does not remain static, since the insurer supports the insured by conducting analyses and providing information when concluding contracts with new customers on the domestic or foreign market, thereby bringing additional quality to the long-term cooperation process.
During the term of the policy, the trade credit insurer shall notify the policyholder of any changes that could affect the financial health of their customers and their ability to make payments for goods or services provided, and then agree on a risk mitigation plan with the insured.
Coverage terms may change during the policy validity period to reflect the financial strength of each customer, while the insurer is responsible for proactively monitoring its policyholders to ensure continuous insight into their creditworthiness.
The policyholder may request an additional limit for trade with any of its customers. The insurer will then assess the risk of increasing the limit and approve or reject the request for an additional credit limit, providing a clear and timely explanation. Insured persons can also request a credit limit for a new client within the existing policy.
Considering all the above aspects, it is clear that accounts receivable insurance is an essential element of business support. It enables companies to ensure business sustainability, growth, increase in sales and competitiveness in existing and new markets through insured receivables collection.
EuroSolutions is Serbian correspondent for ICBA (International Credit Brokers Alliance), which allows us direct access to the global insurance market and the lead insurers in this area, such as:
Using direct connections with the above insurers, we can send your request (application form and authorisation) and provide you with better conditions – more favourable premium rates and the percentage of fulfilment of the required credit limits for your customers, thus supporting your liquidity and cash flows.
According to the Collins Dictionary, the word of the year in 2022 is “permacrisis”.