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What is trade credit insurance?

Trade credit insurance provides cover for businesses if customers who owe money for products or services do not pay their debts, or pay them later than the payment terms dictate. It gives businesses the confidence to extend credit to new customers and improves access to funding, often at more competitive rates. Trade credit insurance is for products and services that are due within 12 months.

According to Government statistics, there were over 17,000 new insolvencies in 2019

Cover can be obtained by companies trading within the UK as well as internationally, and in addition trade credit insurers help their customers manage risk by providing guidance and advice about credit risks and new markets to help businesses expand. Businesses can buy trade credit insurance for their entire portfolio of customers, or for individual accounts.

With trade credit insurance, the policyholder knows their business is protected against both commercial and political risks that are beyond their control knowing that money owed to them will be paid. This helps firms to grow profitably, supporting them at all stages of the business cycle and minimising the risk to them of unexpected customer insolvency.

Trade credit insurers will generally cover two types of risk that a business can include in their cover:

  • Commercial risk - the risk that your customers are unable to pay the outstanding invoices because of financial reasons, for example, declared insolvency or protracted default.
  • Political risk - non-payment as a result of events outside the policyholder or customer’s control, for example due to political events (wars, revolutions);  disasters, (earthquakes, hurricanes); or economic difficulties, such as a currency shortage so are unable to transfer money owed from one country to another.

In 2019, ABI members alone supported business turnover worth over £366bn through the provision of trade credit insurance.

Trade credit insurance is available to businesses of all sizes, from SMEs to large corporates and international businesses across any sector that supplies goods or services on credit terms.

Different types of product are available to suit each type of business, with cover available for both domestic and export trade.

Types of Trade Credit insurance

Credit insurance providers offer flexible products to meet the needs of individual businesses. Policies are designed to cater for the cover requirements of the policyholder’s business and provide a range of options:

  1. A business can typically cover their entire portfolio under one comprehensive policy insuring a wide range of risks across both domestic and export transactions.
  2. Options that provide cover for key buyers only: either on an individual basis or as part of a smaller portfolio of key risks.
  3. There is an increasing market for supplying businesses that have very specific requirements that trade credit insurers can provide tailored solutions for.

There are many different types of credit insurance policies to suit the needs of all businesses:

Single Risk/Buyer – A policy that covers an isolated single risk. This policy is relevant if the policyholder is exposed to a particular market risk, such as an exceptional transaction in relation to the value of the customer’s overall book of business, or a delivery of capital goods, or when cover is demanded by the bank financing the transaction.

Export – A policy that is specifically designed for exporting companies, and provides additional cover for a range of risks such as new import restrictions, war, inconvertibility of exchange, that may arise as a result of the actions of the buyer or a third party government.

Multinational – A policy that provides multinational group-wide or worldwide cover under the same conditions, irrespective of the location of the business units.

Political Risk – A policy that covers inconvertibility of exchange, contract frustration (for example, by civil war), contract cancellation, import and export restrictions, etc.

Excess of Loss − A policy that covers for exceptional losses over and above the normal level of bad debt by setting an aggregate first loss for the whole policy period. It is sometimes referred to as a “Catastrophe policy” aiming to secure the Policyholder against the failure to pay of major buyers.