As global trade accelerates amid a fast-changing risk environment, trade credit insurance has become an essential tool for businesses seeking tailor-made solutions to navigate new challenges.
With a contraction in global trade since the events of 2007/08 and deflationary pressures weighing on markets worldwide, the last few years have seen little growth in the trade credit insurance market. This year, however, the global economic outlook is much brighter, with trade growth tipped at around 5.5%, driven by exports from China, Asia and Germany. However, this growth is threatened by a general sentiment of rising risk, with global macro and micro-trends ranging from protectionism, regional conflicts to political developments such as Brexit and the US administration’s shifting policies on trade. As a result, corporates are increasingly seeking protection against non-payment and non-fulfilment of contracts due to greater supply chain volatility.
“Historically, a lot of world trade was secured through letters of credit especially in emerging markets – as a result, there was less of a role for credit insurance for these flows,” says Tim Hoggarth, head of special products, Euler Hermes Northern Europe.
“This has moved onto a more open account basis in recent years. There is also a lot more interaction around the world and trading from country to country has vastly increased. This creates more uncertainty in the minds of managers and directors. They are looking for the kind of comfort that you’re able to get from a credit insurance policy.”
Global take-up of trade credit insurance (TCI) – which helps businesses trade and grow safely by covering the risk of late or non-payment of open credit invoices – is climbing steadily. Members of the International Credit Insurance and Surety Association (ICISA) insured over US$2.3tn in 2016, up 2% from the previous year. And with that growth comes new ways of delivering TCI for the next generation of business.
Accounts receivable are, in many cases, the largest asset of a company. So late or non-payment of invoices can present an existential threat both to the creditor and for other businesses throughout the entire supply chain. Indeed, in the UK alone, TCI claims paid to businesses due to non-payment in 2016 reached £210mn. That’s the equivalent of over £4mn a week and an increase of 40% on 2015, according to data from the Association of British Insurers (ABI).
But TCI goes beyond a simple insurer-business relationship. Insufficient knowledge about a clients’ solvency can mean a company extends the wrong amount of credit to a client, leading to unpaid invoices. Leveraging a trade credit insurer’s market knowledge and information network means businesses can pick the right credit limit for existing clients, as well as pursue new, larger clients that would otherwise seem too risky.
“Our biggest asset is our company coverage,” says Fabrice Desnos, head of Northern Europe at Euler Hermes.
“We have an ability to obtain information and to grant credit limit requests quickly on companies around the world thanks to our global information database. This remains very relevant to a number of companies.”
In addition to mitigating risks, TCI can also be used by companies to grow their businesses. As banks tend to be more comfortable with lending more to clients with TCI in place, businesses can increase their domestic credit lines, offer extended terms to clients and explore new geographies – all in line with their risk tolerances.
Despite its many advantages, there are still barriers to the take-up of TCI among some corporates, as Desnos explains: “Sometimes companies feel overly confident about their credit risk exposure. If you have not suffered a default for many years and you believe you know your clients well, then the natural inclination is to believe that it’s never going to happen. But experience proves that accidents happen even with clients you feel you are very close to or have been trading with
for many years.”
In addition, as information becomes increasingly available on a fairly easy-to-come-by basis, TCI continues to evolve, and fast.
“We see increasing demand for really tailor-made solutions from larger companies, but also demand for a quicker response and greater integration with those companies,” says Desnos.
This has led to a raft of innovative initiatives from Euler Hermes. The insurer aims to reinvent trade finance, allowing corporates, SMEs, freelancers, B2B marketplaces, supply chain finance businesses and lenders to manage their credit risk in a way which suits them.
“We’re working on the digitalisation of our processes to increase the speed at which we can relate with our clients, and make TCI available on the growing number of digital trade platforms we see emerging,” highlights Desnos.
The insurer recently-announced partnerships between Euler Hermes Digital Agency (EHDA) and Flowcast, a fintech company. Flowcast will deploy its data analytics and artificial intelligence (AI) capabilities to underwrite Euler Hermes’ insurance solution, using invoice-level data to predict metrics like probability of default or expected time for a company to pay its invoice.
It’s not just large corporates that will be able to take advantage of the new, digitalised trade credit insurance offering. Euler Hermes has also designed a specific product for the SME segment, which often lacks the resources or expertise to manage credit risk. Called Simplicity, it has been developed for companies with annual sales between €1mn and €5mn and for those that are unfamiliar with credit insurance.
“We continue to develop very efficient and cost-effective products for SMEs which historically have been the focus of our business in each of the countries where we are present,” says Desnos.
Meanwhile, for industries where advance payments are commonplace, such as the pharmaceutical and media sectors, Euler Hermes has developed a product called Advanced Payment Protection, which reimburses businesses if pre-paid goods or services are not delivered and no refund is available – typically as a result of protracted default, supplier insolvency or political risk. It can also help firms benefit from advance payment discounts and protects agents paying a supplier on behalf of a third party.
The trade finance space is beginning to see the entry of disruptive technology, with blockchain being the most promising. EHDA is currently exploring how TCI would look on a blockchain-based platform. It has developed a proof of concept whereby if a company is not paid by a client at the due date, a smart contract can automatically decide to send an alert to other suppliers of the same client, thereby preventing payment defaults and trading with the insolvent buyer. This solution represents a huge opportunity for companies as it would allow them to receive real-time feedback about their network of partners, thereby enabling them to take safer and sounder decisions.
“We are developing a number of products at the moment with EHDA to cater for the demands of online trade and to be able to adapt products so that we have a greater level of immediate response to client requests,” says Desnos.
Much in the same fashion that digitalisation of the banking sector has transformed traditional customer-bank relationships to allow for a truly personalised product offering, the digitisation of the TCI market means the development of high-tech, sophisticated insurance solutions to fit each client’s particular needs.
“Twenty years ago, there was really just one type of insurance that was supposed to fit everyone, and if a company couldn’t fit the insurer’s box then there was no solution for them,” says Alexia Parmentier, head of XoL, Euler Hermes Northern Europe. “Today, the market has gone entirely the other way, and we are seeing more products being developed to fit everyone.”
It’s XoL (Excess of Loss) product is one such example: designed to protect larger businesses with strong internal credit management practices against exceptional losses, over and above the risk that they are prepared to carry. Companies can pick and choose the amount of risk they transfer to their insurer, while continuing to benefit from the insurer’s information and insight.
“Another trend is that we are no longer seeing credit insurance in isolation, simply as a product that answers the concerns of just the credit manager and the company, but also one that could start responding to the needs of the treasurer and the finance director,” adds Parmentier.
For example, securitisation is a structured finance technique that enables a company to sell assets, including its trade receivables, to external investors. This improves the company’s cashflow and pays the investors a regular coupon or interest payment. The securitised structure for trade receivables can be enhanced by a trade credit insurance policy, which mitigates against non-payment of the receivables and provides greater comfort to investors.
“Buyers of credit insurance want increasingly bespoke products to match their own needs, and this is something which is being satisfied more by special products than the more off-the-shelf whole turnover policies,” says Hoggarth.
“As clients want that more sophisticated response to their insurance needs, they are going to look increasingly to the specialist products market.”
Today, Euler Hermes’ growth strategy is centred upon developing and diversifying its offering, be that with products like XoL and securitisation, with leasing insurance, Single Invoice Cover and bonding, or with bespoke offerings that cover a single contract.
“As a leader in this market, we want to be able to provide all the available solutions that the credit insurance market can offer and lead market innovation in the digital space,” concludes Desnos.
Euler Hermes’ suite of tailor-made solutions
In an uncertain global economic environment, European businesses continue to face significant risks that can arise suddenly. For companies manufacturing customised products, exporting outside of their usual areas, or even taking on a large, new contract outside of their usual scope of business, Euler Hermes has developed a new kind of insurance cover called Cover One. Designed to insure a specific contract for up to 36 months, with a credit limit that’s non-cancellable, Cover One is different to ‘single risk’ insurance which is usually for repeat business, with a policy that stays in place for 12 months.
“The key distinguishing feature of this coverage is its constancy, since the level of the guarantee is maintained over the life of the contract,” says Milo Bogaerts, commercial director at Euler Hermes Northern Europe region. Cover One covers the risk of unpaid invoices following delivery, as well as the risk of a breach of contract caused by a range of issues, from insolvency of the debtor right through to import or export license suspension, insurrection and government actions, by both public and private sector buyers.
“If a business has to deliver a capital good to its buyer and the latter party decides to breach the contract in force, the supplier can be indemnified based on the itemised losses established at that point,” explains Bogaerts.
Asset and equipment leasing has become increasingly popular in a wide spectrum of industries such as manufacturing, agriculture, public, mining, construction and health care. According to Leaseurope, the European leasing industry grew by 11.2% in 2016 – the highest annual growth rate since 2007. An increasing number of companies in an increasing number of industries seem to prefer to lease rather than to own.
But with this growth comes greater potential for late payment of lease instalments, an issue which a new product from Euler Hermes, Cover Lease, aims to address. The product is a specific insurance solution that covers leasing operations with a non-cancellable cover for up to five years, and supports the business-to-business leasing industry. In effect, companies taking out the insurance will continue to receive regular payments even if their leasing partner has failed to pay or is unable to pay future instalments.
“In response to demand from leasing companies, financial organisations and brokers to protect leasing payments, we are putting our risk expertise and balance sheet at their service,” says Dominique Spiranski, CEO of Euler Hermes Nordic region.
Single Invoice Cover
The first breakthrough product from Euler Hermes’ Digital Agency is Single Invoice Cover. It protects companies against non-payment in the same way as traditional TCI but rather than insuring a company’s whole turnover, it insures companies on an invoice by invoice basis. The product uses a proprietary application programming interface (API), which creates a seamless process for customers who can get instant decisions on price and cover per invoice before deciding whether to insure.
Single Invoice Cover addresses the needs of SMEs, freelancers and other e-commerce platform users who transact on an open account basis. It is also of interest to distribution partners such as banks, lending platforms and online marketplaces. Single Invoice Cover not only protects B2B trade from defaults, transaction by transaction, but also optimises end-to-end supply chains. This allows companies to extend the best possible credit terms to buyers, while ensuring suppliers and platforms remain in total control of their credit exposure.
Designed for medium to large corporates with a turnover above €100mn, XoL is a credit risk management solution designed to help companies mitigate significant losses and improve balance sheet efficiency. Launched by Euler Hermes in 2012, the XoL service has seen increasing interest from clients and brokers, and the insurer this year expanded the unit’s remit and underwriting capacity. “XoL take-up tends to be companies who have historically had a traditional whole-turnover ground-up policy, but have grown to a size where they now feel they want to take more control themselves,” says Hoggarth.
“But they don’t yet have the confidence or perhaps the systems in place to manage credit limits and the like themselves.”
The XoL policy provides various levels of credit limit underwriting, depending on the needs of each company, allowing them to gain confidence in how the product works at their own pace. It enables companies to gradually make a step change rather than having to take a full leap into the deep-end of an excess of loss product.
For companies, the benefits are clear: given the knowledge that maximum losses are going to be a certain level, with the insurer stepping in after that, XoL provides comfort and peace of mind to credit managers and treasurers.
A structured finance technique that enables a company to sell its trade receivables to external investors, therefore improving its cashflow and mitigating the risk of non-payment, securitisation can be backed by TCI, whereby the portfolio of trade receivables is insured, providing greater comfort to investors.
“Securitisation is increasingly used by banks as a method of raising funds for trade finance deals,” says Hoggarth.
“If the client has a trade credit insurance policy, the bank can rely on the insurer’s rating, rather than the individual rating of the buyers, when weighing the risk on the portfolio. That would allow them to hopefully fund at a lower rate, making the most of our AA- rating, which could lead to cheaper lending rates, and hopefully the lending of more money to the supplier.”
Euler Hermes is now working to develop specific wordings which are flexible enough to meet individual banks’ needs while also providing the necessary level of comfort for banks to provide TCI to their clients.
“The way we are expecting securitisation to develop will be highly reliant on new technology to provide an up-to-the-minute flow of information between the company that is looking for funds, the investor and the insurer. This is going to allow us to reach companies that wouldn’t otherwise be interested in securitisation,” says Parmentier.
For companies and clients which are brought together for the first time by cross-border contract awards, written guarantees seeking a new business partner to put up security when awarded a contract are increasingly being used to ensure work is carried out according to a client’s wishes. Under bonding cover, an insurer can act as an independent guarantor, assuming liability for contractor obligations in construction and supply, for example. Euler Hermes estimates that the European bonding market is worth approximately US$3.5bn, with the combined market in North and Latin America worth US$7.2bn.
“Clients are increasingly looking for flexible solutions, requesting short lead times and rapid decision making and we need to be in a position to respond to this. Euler Hermes in the UK has developed a highly experienced team and streamlined applications, and approvals processes meet these demands – ensuring we cover the basics well and deliver on time,” says Andrew Potts, bonding director at Euler Hermes UK and Ireland.
A long established product in the UK and certain other Northern European countries, more and more multinational corporations are now looking for global support and solutions, as Potts explains: “For example, an Asian sovereign wealth fund decides to invest in an infrastructure project in Europe being run by a North American project contractor who is contracting local European firms for the work. They all want and need the reassurance of a global network, flexible underwriting and a big balance sheet to underwrite the bonding elements.”
Euler Hermes offers bonding services in 24 markets directly, and a total 30 markets including those through its parent company Allianz. IIn addition, the bonding team has just started doing business in Canada and is looking to expand in the US and Brazil.
While bonding has typically seen most take-up in retail and construction, there is enormous potential for new industries, such as the fintech sector, to take advantage of bonding’s ability to help manage risk. New alternative developments such as bonding being an alternative to a letter of credit or other type of guarantee previously offered by a bank are also emerging.
“Since the financial crisis banks have had less capital to deploy. We can step in and offer to support a deductible bond under a corporate insurance programme, or as part of a recovery plan to help cover a deficit under a defined benefit pension scheme. This would have been unheard of a few years ago,” says Potts.