Unlocking growth: The next chapter for trade credit insurance
Trade credit insurance (TCI) was first introduced as a product line in 1918 and since then it has continued to evolve as a concept and marketplace. For many years it was possible for insurers to maintain profits in this class by offering standard “goods sold and delivered” policies with occasional factoring or receivables programmes, which were implemented along the way.
However, for over a decade now, trade credit insurance has seen increased competition, more sophisticated risk algorithms, greater awareness and demand for the product from non-corporates, leading to a range of TCI products offered in the market.
There will always be strong demand for whole turnover (WTO) products, whereby the clients typically out-source the credit limit underwriting of their top 20% of customers (and 80% by value) to the insurer, in exchange for a 90% indemnity and modest discretionary limit, allowing them to retain their own underwriting pen for their smaller customer base.
The success of this product – coupled with the relatively benign claims environment since the increase in political risk notifications and oil-price developments driven by the Russia-Ukraine conflict in 2022 – have led to insurers building-up large levels of exposure on key buyer names in various sectors, including: electronics/technology, retail, oil and gas and food and beverage.
This has resulted in a huge demand for top-up and syndicated policies, as carriers reach a point where they’re close to or at full capacity on high-profile names, and clients are forced to look elsewhere to purchase the full coverage they need.
For many TCI insureds in the tech sector, for example, high volume and low margins mean that getting maximum insurance coverage of their ledger is paramount because an uninsured large debt can cause significant disruption to the business and the latter meeting its financial targets.

Getting ahead of the game
Having the scope to provide additional capacity is also pertinent when it comes to seasonal peaks and demand for limits in excess of what the primary insurer is able to issue grows year-on-year, and the race for the excess capacity starts earlier every year. Most clients in the retail or electronics sectors are now looking to purchase additional capacity as early as July or August, ahead of Black Friday campaigns and commitments to supply their customers in September with products.
For clients that have a turnover of £100 million (and above) and an experienced credit management team already employing a pragmatic approach to credit management procedures, the excess of loss (XOL) product, with its high level of discretionary credit limit and 12-month non-cancellable limits offering, in exchange for a higher deductible structure than with the WTO programmes, should cater for their needs.
The XOL cover is a contract and understanding between client and insurer, with the insurer putting its faith in the strong credit management of the clients, and in turn the assureds enjoy the freedom to keep running their business as they have previously, comforted by the long-term support of the carrier. This type of product is common in the UK and is starting to gain traction across continental Europe, albeit the purchasing of TCI tends to still lend itself to WTO programmes.
Another area which has experienced significant growth over the past 15 years is the purchasing of TCI products by banks and related financial institutions (FIs). Previously, these institutions would have bought TCI policies to cover their receivables and factoring programmes; however, purchasing habits have evolved and now there is considerable demand for supply chain finance (SCF) and payables programmes, inventory finance (IF), purchase order (PO) finance, and non-trade offerings, such as cover for term loans and revolving credit facilities (RCFs).

Understanding your customer and risk inside out

These offerings have varying degrees of risk and it comes down to the underwriting of the client as much as it does the obligor. For example, when analysing SCF programmes, does the FI know who the seller or sellers are in the programme? How much further are they extending the terms for their customer to make good on payment and what payment instrument is being used to make the payment?
It is a similar story with the IF and PO offerings, whereby understanding the motivation for purchasing this type of product is one of the fundamental questions an insurer employs. Understanding the sector and what security the client holds and how it is realisable is key.
Additionally, having the ability to offer these products and knowing how the insurance offering can complement the existing procedures that banks have in place is critical for insurers, especially if they’re looking to grow their business and branch out from standard product offerings, which can be subject to intense price competition. And this is before we start to take pre-payment cover and off-taker risk, derivatives cover and mark to market exposure into account, as well as other trader-led policies that are offered more commonly in the market.
It invariably whittles down to carriers knowing their client as well as they know the risk, while continuing to evolve and adapt to changing market conditions and motivations for purchasing TCI coverage.
With the development of AI and more sophisticated risk-modelling tools, insurers must ensure they’re keeping pace with the changing world and have the skillset and products to match-up to their clients’ evolving needs and expectations. Being able to provide a suite of various trade and sector-specific solutions while maintaining reinsurer support to grow, evolve and introduce new ones, will be crucial for carriers to not only stay ahead of the curve, but also meet the growing demand for the trade credit product line.