Financial Crisis Drives Uptake of Trade Credit Insurance

The insurance industry tends to view North America as a mature, saturated market, but trade credit insurance bucks the trend, and is showing double-digit annual growth, according to Coface North America.

About 80% of its business comes from new purchasers, according to Michael Ferrante, president and chief executive officer (CEO) of the trade risk management firm. He estimates the market is growing at 10% to 12% annually.

North America has a lower penetration of trade credit insurance than more established markets, he said. The North American market is probably below US$1bn in premium, while Europe is three to four times that size. “If you look at the gross domestic products [GDPs], we’re about the same size. That’s why everyone looks at the US like a growth market,” he said.

Jochen Duemler, CEO of Euler Hermes North America, said that credit insurance is a standard tool for European chief financial officers (CFOs), who can use the policies to enhance the company’s credit management. But there is a cultural difference in North America, where “there’s more of a risk taking, entrepreneurial spirit.”

The rise in corporate bankruptcies during the 2008 credit crisis impacted the trade credit insurance industry’s profitability, but also helped to raise awareness of the product, which protects a company’s account receivables.

“A consequence of the big financial crisis in 2008-09 was that more and more companies became aware of the fact that the receivable risk, which is very often a large portion of the assets on a balance sheet, should be better insured because they suffered heavy losses,” Duemler said.

For every $1 of premium that US credit insurers wrote for businesses and consumers in 2008, they paid out $1.69 in claims. Combined ratios have improved since, to 91.4 in 2012.

Industry leaders expect North American demand for trade credit insurance to grow further. Ferrante sees a major opportunity for small and medium-sized enterprises (SMEs) to purchase the product.

“Where the US misses the boat, as opposed to Western Europe or the EU, is that many more SMEs are familiar with exporting. Again, some of it has to do with the nature of the geography, but here is where I think the US needs to grow.”

Duemler said the product can help business expand into new, unfamiliar territories. Trade credit insurance can be used as collateral to help secure bank loans.

Coface estimates about 30% of its portfolio have banks as beneficiaries, said Ferrante. “We see banks come in and out during a crisis. We have a lot more conversations with banks about the product, but banks are a very competitive industry and when you have multiple banks fighting for the same loan, their ability to require credit insurance decreases.”

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