Trade Credit Insurance
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Template:Orphan Trade Credit Insurance is a risk management product offered by governmental Export Credit Agencies and some private insurance companies to business entities wishing to protect their balance sheet asset, accounts receivable, from loss due to credit risks such as protracted default, insolvency, bankruptcy, etc. This insurance product, commonly referred to as credit insurance, is a type of Property & casualty insurance and should not be confused with such products as credit life or credit disability insurance, which the insured obtains to protect against the risk of loss of income needed to pay debts. Trade Credit Insurance is similar to, and may include a component of political risk insurance which is offered by the same insurers to protect assets in foreign countries from loss due to currency issues, political unrest, expropriation, etc.
This points to the major role Trade Credit Insurance plays in facilitating International trade. Trade credit is is offered by vendors to their customers as an alternative to prepayment or cash on delivery terms, providing time for the customer to generate income from sales to pay for the product or service. This requires the vendor to assume non-payment risk. In a local situation this risk may be slight, but in an export transaction, where laws, customs, communications, and customer's reputation are not fully understood, the risk increases. In addition to increased risk of non-payment, international trade presents the problem of the time between product shipment and its availability for sale. The account receivable is like a loan and represents capital invested, and often borrowed, by the vendor. But this is not a secure asset until it is paid. If the customer's debt is credit insured the large, risky asset becomes more secure, like an insured building. This asset may then be viewed as Collateral (finance) by lending institutions and a loan based upon it used to defray the expenses of the transaction and to produce more product. Trade Credit Insurance is, therefore, a trade finance tool.
History
Trade Credit Insurance was born at the end of nineteenth century, but it was mostly developed in Western Europe between the first and Second World Wars. Several companies were founded in every country, some of them also managed the political risk to export on behalf of their State.
Over the '90s, a concentration of the Trade Credit Insurance market took place and three companies became major players with Export Credit Agencies in an expanding, global market:
- Euler Hermes, member of the Allianz Group.
- Atradius formed from a merger of German-based Gerling Credit Insurance Group and NCM in the Netherlands and a partnership with Credito y Caucion in Spain.
- Compagnie Française d'Assurance pour le Commerce Extérieur (Coface). Formerly a French government sponsored institution established in 1946.
- QBE Trade Credit, an Australian based general insurer after its acquisition of Trade Indemnity plc.
