Amid geopolitical tensions, economic uncertainty and supply chain disruption, cross-border businesses are rethinking credit risk and portfolio management. Increasingly, excess of loss (XOL) solutions offer a more strategic, flexible and cost-efficient way to manage exposure, writes Joep van der Bijl, lead underwriter, multi-buyer trade credit, Continental Europe at Liberty Specialty Markets.
Traditionally, trade credit insurance has operated on a whole turnover basis, where the policyholder agrees to insure all their accounts receivables worldwide. Whilst this model has proven to be effective, it offers little to no flexibility, requiring companies to cover all credit sales within their portfolio.
This approach offers blanket simplicity, with insurer-led buyer monitoring and broad protection. However, in practice, these policies rarely reflect 100% risk appetite, with the riskiest portion of the portfolio remaining uninsured. Especially for large, diversified businesses with strong credit control processes, it could mean they pay for cover and services they don’t need or rarely use. For these companies, this traditional insurance model can therefore be considered costly and inefficient, requiring them to rethink their credit strategies and use insurance more strategically, rather than universally.
Today, traditional whole turnover credit insurance has reached high market penetration, which means that innovation is needed to grow the market and to support business that would not fit the conventional models.
Historically, most companies valued the insurer’s intelligence about their debtors, and they’ve used credit insurance as a tool to outsource their credit management. Now, many large corporates have built their own robust credit management systems, prompting a shift in demand. These companies have the financial strength and resources to bear their own losses to a certain degree, and they no longer seek blanket coverage only. Instead, they require tailored, flexible solutions that offer greater freedom, allowing them to set and manage their own credit limits and to be protected against catastrophic loss events.
In a competitive and challenging market, trade credit insurers must evolve to meet the changing needs of their corporate clients.
“The scope of this underwriting creativity is not limited to short-term open account sales, as XOL programmes can also accommodate portfolios of longer contract tenors, non-standard insurance products and multi-year exposures.”
Joep van der Bijl, Liberty Specialty Markets
XOL: A bespoke solution
To grow amid heightened volatility and uncertainty, companies need credit insurance to reflect their unique risk profile and portfolio composition. This calls for a more bespoke approach, and XOL programmes are increasingly being adopted to provide the targeted, flexible cover that globally active businesses require.
While XOL is not a new concept in trade credit insurance, its application has developed more recently. XOL policies have long been seen as an alternative solution for large and diversified portfolios – traditionally supported by the whole turnover market – but more bespoke approaches and XOL applications are starting to emerge. Its core strength – protecting against high-severity losses – makes it equally valuable for selective portfolios where risk concentration can be significant, hampering sustainable growth.
Under traditional whole turnover structures, the insurance market tends to pull back from challenging and volatile areas. In contrast, large corporate clients are often more comfortable with these risks since they have the internal capabilities to manage exposures and are willing to retain first-loss positions. This more nuanced and strategic risk sharing makes the XOL market more open to support these types of exposures – provided the policy is structured and modelled appropriately.
XOL structures offer greater underwriting flexibility and creativity, enabling insurers to tailor policies to meet specific client needs and to better support their strategic ambitions.
As a recent example, we worked with a client operating across various challenging markets. By introducing a combination of policy-, country-, and per-buyer deductibles, we were able to design a structure that enabled us to support higher credit limits than would have been possible under a ground-up or single risk structure. This type of risk sharing is making it viable for all parties involved and provides the client with the capacity to pursue growth in more challenging territories.
Importantly, the scope of this underwriting creativity is not limited to short-term open account sales, as XOL programmes can also accommodate portfolios of longer contract tenors, non-standard insurance products and multi-year exposures.
Also, in addition to the usual protection against insolvency and protracted default, additional coverage can be incorporated, tailored to the client’s operational realities. This includes protection for losses as a result of early termination of a contract by a defaulting obligor, commonly known as replacement risks. In such cases, the policy can cover the additional cost or financial loss incurred by the insured due to the need to replace a defaulting buyer or counterparty. This includes, for example, the higher cost of procuring the commodity on the market as a result of the default.
Insurance as a strategic enabler
Typically, our clients are leading players in their sectors and span diverse geographies. While they see opportunities for growth, they also require efficient risk transfer mechanisms to support that ambition. For these businesses, modern trade credit insurance is not just about protecting the status quo, but rather a strategic enabler of growth.
A key driver of Liberty’s multi-buyer trade credit success has been our ability to create and structure innovative solutions, with the majority of our new business being new to the insurance market.
It’s important to emphasise that partnership and close collaboration are essential to making these solutions effective. By working closely together with brokers and clients to identify strategic opportunities, we can design and structure programmes that perfectly align with their internal risk appetite and broader business objectives. Strong partnerships, mutual trust and a shared long-term commitment form the foundation of this success.
To summarise, XOL offer clients flexibility and control over their risks. Companies can manage their own credit limits for day-to-day exposures while relying on insurance for large, concentrated, or catastrophic losses. These solutions can be structured in many ways to ensure tailored, targeted protection where it matters most, while also delivering cost efficiency, as clients only pay for the cover where it’s truly needed. By engaging collaboratively, these tailor-made solutions provide confidence and capacity to enter new markets and to scale operations safely.
In today’s complex and dynamic global environment, this combination of flexibility, creativity and strong partnership makes trade credit insurance evolve from a reactive safety net against credit losses into a proactive tool to drive growth and competitive advantage.
