What is Trade Credit Insurance?

Trade Credit Insurance is a risk management tool that protects businesses against the financial loss resulting from the non-payment of trade debts for goods and services. Consider the following scenario.

Top Electronics manufactures and exports electronic components. Top Electronics often sells its components to local and international customers on credit payment terms, allowing buyers to pay at a later date, typically 30 to 60 days after shipment. In some cases, the manufacturer is concerned about the risk of bad debt and non-payment due to various factors, which could include financial insecurity or economic uncertainties. To mitigate this risk and protect cash flow, Top Electronics purchases a trade credit insurance policy from an insurance provider. The provider conducts a risk assessment on the creditworthiness of the buyer/s and either approves or declines the policy based on the amount applied for. In the event that a buyer faces financial difficulties, encounters bankruptcy or simply doesn’t pay, the policy will provide some financial protection when the claim is approved.

The Trade Credit Insurance service involves two main aspects – the approval or decline of the application (which is approved by underwriters), and the claim payout of outstanding invoices in the case of default. But there are challenges in using this service as it has certain exclusions and limitations. We discuss these below.

The Six Shortcomings of Credit Insurance

The six shortcomings of Trade Credit Insurance are:

These are explained further below.

1. Credit Policy Control

The Credit Insurer Controls Your Credit Policy

This may be helpful for businesses that cannot manage their own credit management policies, but it should be noted that the insurer is protecting their own profits, which could present a conflict in strategies. For example, you may have a strategic need to accept higher credit risk for some customer segments, but the insurer will apply a single conservative credit policy across all. And penalties may apply if businesses trade beyond what was approved.

How important is it to be able to use credit policy to support your business?

Trade Shield

Trade Shield offers a recommended credit limit based on the combination of predictive models and your credit strategy. Businesses are able to maintain and manage different credit strategies for different customer segments, according to the needs of each.

In the case of Top Electronics, the business would’ve been able to apply their own limit, as appropriate for that customer or customer segment. This would’ve allowed a more nuanced approach in support of growth and business strategy.

2. Data Sources for Assessment

Credit Insurers Rely Heavily on Financials

Credit insurers rely on recent financial statements in order to calculate expected credit losses. Buyers will need to provide their financial statements to the risk insurer for review. This can become an obstacle in the case of private companies. In some cases, the risk insurer could rely on your business to assist with collecting their financials.

If you can’t get hold of the buyer’s financials, will you be comfortable trading at more conservative levels?

Trade Shield

Trade Shield uses all available financial statements during analysis. In addition, your business can rely on Trade Shield’s predictive modelling that uses numerous data sources. This includes payment and behavioural patterns derived from your own AR/Aging datasets.

In the case of Top Electronics, the manufacturer would’ve benefitted from an almost instant outcome as a result of Trade Shield’s multiple, real-time data sources.

3. Turnaround Time

Credit insurers are slow

Today’s insurers typically rely on manual processes and traditional channels, like emails and phone calls, when interacting with customers and buyers. These businesses have not been quick to transform their approaches to digital ones. This slows down the process between application and approval.

Will your business and your customers be impacted by credit limits that take 3 to 5 days to approve?

Trade Shield

Trade Shield delivers over 90% of credit limits within 30 minutes, and most of them almost instantly. Trade Shield has invested in technologies that integrate data from different sources automatically. This data is then run through models and the decisioning framework at high speed to deliver tens of thousands of limits every day.

In the case of Top Electronics, the buyer would’ve applied for credit digitally and the application would’ve been processed and analysis done in real time, providing an outcome almost instantly.

4. Targeted Outcomes

Credit insurers focus on their overall loss ratio, not your profitability.

Insurers pool the risk of all their policy holders to avoid negative financial impact. Insurers avoid over-exposure – if credit has already been granted to your customer when buying from your competitors, your submission may be declined. Your ability to trade may be affected while your competitors can continue.

Is it important that you’re able to trade through economic downturns, especially with key customers?

Trade Shield

Trade Shield provides your business with full control over your credit limits. You’re able to make conscious trade-offs for certain customer segments while maintaining visibility of your risk. Trade Shield’s targeted outcome is to maximize the profitability of your extended credit and your business, without trade-offs.

Trade Shield understands that customers need to be treated differently in order to maximise profitability. In the case of Top Electronics, the business would’ve been able to make limit decisions that are appropriate for customer segments, thereby promoting business growth of both parties.

5. Transparency

Credit insurers’ internal views remain unknown.

Submissions are either approved or declined without detail, analysis or limit recommendations when declined. Suggested limits can’t guide decision making because the analysis fundamentals are not understood. Independent analysis is needed to fully understand the associated risks and opportunities.

When a credit limit for a key customer is declined, do you want to know the reason? Also, how important is an independent view of a growing customer that you are nurturing?

Trade Shield

Trade Shield provides all the logic and risk analytics for further review if needed. Furthermore, limit recommendations look toward the future and show an independent assessment of where this customer can progress to.

6. Cost Versus Value

Insurance may not be cost-effective.

If your business is claiming a significant amount every year then the insurance may be worth the cost. But if you’re only using it for a safe trading limit, and claiming very little, then it’s a very expensive risk mitigation option.

How do you assess the value of the protection and credit limit recommendations from your insurer? How much would you pay for an independently assessed limit?

Trade Shield

Trade Shield is priced in relation to additional profit it delivers. This ensures alignment between Trade Shield’s cost and the value it delivers.

What should your business be using?

Credit Insurance is suitable for your business if:

Trade Shield is suitable for your business if: