U.S. Firms Seek Trade Credit Insurance to Protect Revenues

March 13, 2009

As the global economy remains in recession, a growing number of U.S. manufacturers and distributors are looking for effective ways to protect their revenue streams. In particular, firms marketing their goods and services to vulnerable industries or for export are seeking trade credit insurance to guard against the possibility of a default by their business partners.

Demand for this coverage has skyrocketed in the past year, and insurers are now cautious about what they are willing to cover and what they charge for the coverage, according to large insurance broker, Marsh.

Marsh reports that insurers not only are being more cautious about the trade credit risks they are willing to accept, but are declining a significant percentage of applications for this coverage. As insurers look for ways to manage their trade credit risk portfolios, many are shying away from programs aimed primarily at industries severely affected by the downturn. They are also charging as much as 20 percent or 30 percent more to renew existing policies and demanding larger deductibles and higher coinsurance, Marsh says.

At the same time, the broker says these insurers are focusing greater attention on smaller and less complex exposures, as well as on programs that are not focused around troubled industries.

“The shift in focus among insurance companies to more manageable programs represents a significant opportunity for mid-sized businesses to purchase this coverage for the first time or to expand their existing credit insurance programs,” said Jim Dezell, senior vice president of Marsh’s Trade Credit Practice. “In this difficult economy and credit environment, this insurance can provide significant benefits to a business both in terms of protecting critical revenue streams and possibly enhancing a firm’s overall credit picture.”

In some instances, financial institutions may view insured receivables more favorably in determining a company’s overall credit profile.

“Trade credit is one of the more versatile insurance coverages,” Dezell added. “It can be structured to apply to one major business partner or to insure an entire book of business in specific geographic markets. The coverage also can be concentrated on key accounts or on a business partner involved in a bankruptcy proceeding.”

According to Marsh, businesses seeking to buy credit insurance must be able to present clearly to insurers how they audit and review their current exposures, along with how they manage these risks.

“Being able to demonstrate sound credit management procedures is also important for discussions with insurers,” said Dezell.

Source: Marsh
www.marsh.com

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