Is your trade credit insurance recession-proof?
by Sharon Giddings, Head of UK Trade Credit at AIG
With trade disputes escalating, the rate of business failures accelerating and other economic indicators suggesting the next recession may be on its way, the global business outlook appears increasingly turbulent. We believe corporates that prepare for any downturn with robust risk and credit management should be taking a closer look at non-cancellable trade credit insurance to protect cash flows from their client base should tough times come.
The gap between yields on US Treasury two-year and ten-year bonds has
shrunk in recent months to its lowest spread since the 2008 financial crisis,
causing some analysts to raise concern that a global economic downturn is
approaching. Historically, an inverse yield curve – where two-year notes pay
bondholders more than 10-year notes – is an accurate indicator that a
recession may occur within 12 months.
Rising tensions and tariff battles between some of the world’s biggest
economies are meanwhile triggering fears that a full-blown trade war could
develop. This could disrupt companies’ sales channels at a time when
globalisation is already driving up competition.
In the UK alone, an extremely difficult trading environment for firms has led to
the highest number of trade credit insurance claims since 2009, according to
figures from the Association of British Insurers (ABI). During the first quarter of
2018, the number of new claims surged 50% compared with Q4, equating to 44
new claims every day.
The role of non-cancellable insurance
While companies can’t change the macroeconomic environment they operate
in, they do have control over their own credit risk management – and by
extension the kind of trade credit insurance they buy.
AIG are able to offer non-cancellable trade credit insurance under which there is a commitment to maintaining credit coverage for future shipments to buyers on a client’s policy, even if the buyer posts poor operating results or is downgraded. Likewise, coverage remains intact when a country or entire industry sector runs into trouble.
This provides certainty to policy holders that once a credit limit is established it will remain in place for a specific time – usually the duration of the policy – unless the insured requests otherwise.
“With credit limits in place that stand the test of time, policy holders can negotiate and invest in long-term relationships with their customers”, says Sharon Giddings, Head of UK Trade Credit at AIG.
More autonomy
Underwriters are able to extend the additional protection of non-cancellable cover to customers with strong credit management. The product is therefore available predominantly for larger companies that already have sophisticated risk and credit management strategies in place or mid-sized companies who are willing to strengthen those capabilities by utilising online platforms.
In return, policy holders are given more autonomy in how they implement that strategy – only being required to provide guidance on customers once a year, when a policy is put in place or renewed – while being secure in the knowledge that their insurance partner will remain steadfast during a storm.
This is different to cancellable or whole turnover policies under which policy holders effectively rely on their insurer to take control of their credit management.
AIG are able to offer non-cancellable trade credit insurance under which there is a commitment to maintaining credit coverage for future shipments to buyers on a client’s policy, even if the buyer posts poor operating results or is downgraded. Likewise, coverage remains intact when a country or entire industry sector runs into trouble.
This provides certainty to policy holders that once a credit limit is established it will remain in place for a specific time – usually the duration of the policy – unless the insured requests otherwise.
“With credit limits in place that stand the test of time, policy holders can negotiate and invest in long-term relationships with their customers”, says Sharon Giddings, Head of UK Trade Credit at AIG.
More autonomy
Underwriters are able to extend the additional protection of non-cancellable cover to customers with strong credit management. The product is therefore available predominantly for larger companies that already have sophisticated risk and credit management strategies in place or mid-sized companies who are willing to strengthen those capabilities by utilising online platforms.
In return, policy holders are given more autonomy in how they implement that strategy – only being required to provide guidance on customers once a year, when a policy is put in place or renewed – while being secure in the knowledge that their insurance partner will remain steadfast during a storm.
This is different to cancellable or whole turnover policies under which policy holders effectively rely on their insurer to take control of their credit management.
Under both cancellable and non-cancellable forms of credit insurance, there
will be some form of risk retention. In the case of non-cancellable coverage,
that risk sharing is agreed up front prior to policy inception in the form of a
deductible set to reflect the insured’s loss experience, risk tolerance, and
financing arrangements. In the case of cancellable coverage, the deductible
may be lower (or even zero), but unexpected risk sharing can occur due to the
insurer’s decision to cancel buyer coverage during the lifetime of the policy.
Certainty in a storm
The additional certainty provided by non-cancellable trade credit cover not only means that a company can protect its trade flows throughout the entire economic cycle, but enables it to stand by its customers during difficult periods.
This means its customer-base is more likely to remain intact – and its own sales recover quickly – once the trading environment recovers. We think now is the time for brokers to raise the benefits of non-cancellable solutions with their clients.
AIG’s non-cancellable trade credit insurance products allow policy holders to remain in control of their customer relationship and expand their sales while taking advantage of AIG’s A+ rating, plus its wealth of market intelligence, country knowledge, sector specialists and experienced underwriters.
Certainty in a storm
The additional certainty provided by non-cancellable trade credit cover not only means that a company can protect its trade flows throughout the entire economic cycle, but enables it to stand by its customers during difficult periods.
This means its customer-base is more likely to remain intact – and its own sales recover quickly – once the trading environment recovers. We think now is the time for brokers to raise the benefits of non-cancellable solutions with their clients.
AIG’s non-cancellable trade credit insurance products allow policy holders to remain in control of their customer relationship and expand their sales while taking advantage of AIG’s A+ rating, plus its wealth of market intelligence, country knowledge, sector specialists and experienced underwriters.
We would welcome discussions with broker partners about how we can tailor
bespoke solutions to meet your clients’ requirements, whether on an excess of
loss basis for larger companies, or via our Trade + product for mid-sized
companies.
About the Sponsor: AIG
AIG Trade Credit provides solutions with non-cancellable credit limits for large and mid-sized
companies alike.
For businesses with an annual turnover of £10m and above Trade+ provides credit limits that are non-cancellable for 12 months. All credit limits are calculated automatically using trading history or are set by an AIG underwriter. Trade+ uses an online platform to analyse how the policyholder’s buyers are performing. It displays an up to date picture of exposure cover, provides stop shipment alerts and ensures policy compliance by removing the need for overdue reporting and turnover declarations. Pre-approved limits and invoice data captured within the IT platform enable a simplified claims process.
For larger companies our Global Trade Excess of Loss policy includes non-cancellable credit limits to provide certainty of cover for the duration of a policy. Our online platform, Global Limits Manager, supports the policyholder’s existing credit management procedures by setting credit limits below a DCL, managing stop shipments and overdue reporting.
We would welcome discussions about how we can tailor bespoke solutions to meet your client’s Excess of Loss requirements for Multinational and Captive Solutions.
To find out more please call Sharon Giddings on +44 (0) 20 7954 8289 or via email: sharon.giddings@aig.com or speak to a member of the UK Trade Credit team.
For businesses with an annual turnover of £10m and above Trade+ provides credit limits that are non-cancellable for 12 months. All credit limits are calculated automatically using trading history or are set by an AIG underwriter. Trade+ uses an online platform to analyse how the policyholder’s buyers are performing. It displays an up to date picture of exposure cover, provides stop shipment alerts and ensures policy compliance by removing the need for overdue reporting and turnover declarations. Pre-approved limits and invoice data captured within the IT platform enable a simplified claims process.
For larger companies our Global Trade Excess of Loss policy includes non-cancellable credit limits to provide certainty of cover for the duration of a policy. Our online platform, Global Limits Manager, supports the policyholder’s existing credit management procedures by setting credit limits below a DCL, managing stop shipments and overdue reporting.
We would welcome discussions about how we can tailor bespoke solutions to meet your client’s Excess of Loss requirements for Multinational and Captive Solutions.
To find out more please call Sharon Giddings on +44 (0) 20 7954 8289 or via email: sharon.giddings@aig.com or speak to a member of the UK Trade Credit team.
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