Sharon Giddings, AIG UK Head of Trade Credit
With trade disputes escalating, the rate of business failures accelerating and other economic indicators suggesting the next recession may be on its way, the global business outlook appears increasingly turbulent. We believe corporates that prepare for any downturn with robust risk and credit management should be taking a closer look at non-cancellable trade credit insurance to protect cash flows from their client base should tough times come.
The gap between yields on US Treasury two-year and ten-year bonds has shrunk in recent months to its lowest spread since the 2008 financial crisis, causing some analysts to raise concern that a global economic downturn is approaching. Historically, an inverse yield curve – where two-year notes pay bondholders more than 10-year notes – is an accurate indicator that a recession may occur within 12 months.
Rising tensions and tariff battles between some of the world’s biggest economies are meanwhile triggering fears that a full-blown trade war could develop. This could disrupt companies’ sales channels at a time when globalisation is already driving up competition.
In the UK alone, an extremely difficult trading environment for firms has led to the highest number of trade credit insurance claims since 2009, according to figures from the Association of British Insurers (ABI). During the first quarter of 2018, the number of new claims surged 50% compared with Q4, equating to 44 new claims every day.
While companies can’t change the macroeconomic environment they operate in, they do have control over their own credit risk management – and by extension the kind of trade credit insurance they buy.
AIG are able to offer non-cancellable trade credit insurance under which there is a commitment to maintaining credit coverage for future shipments to buyers on a client’s policy, even if the buyer posts poor operating results or is downgraded. Likewise, coverage remains intact when a country or entire industry sector runs into trouble.
This provides certainty to policy holders that once a credit limit is established it will remain in place for a specific time – usually the duration of the policy – unless the insured requests otherwise.
“With credit limits in place that stand the test of time, policy holders can negotiate and invest in long-term relationships with their customers”, says Sharon Giddings, Head of UK Trade Credit at AIG.
Underwriters are able to extend the additional protection of non-cancellable cover to customers with strong credit management. The product is therefore available predominantly for larger companies that already have sophisticated risk and credit management strategies in place or mid-sized companies who are willing to strengthen those capabilities by utilising online platforms.
In return, policy holders are given more autonomy in how they implement that strategy – only being required to provide guidance on customers once a year, when a policy is put in place or renewed – while being secure in the knowledge that their insurance partner will remain steadfast during a storm.
This is different to cancellable or whole turnover policies under which policy holders effectively rely on their insurer to take control of their credit management.
Under both cancellable and non-cancellable forms of credit insurance, there will be some form of risk retention. In the case of non-cancellable coverage, that risk sharing is agreed up front prior to policy inception in the form of a deductible set to reflect the insured’s loss experience, risk tolerance, and financing arrangements. In the case of cancellable coverage, the deductible may be lower (or even zero), but unexpected risk sharing can occur due to the insurer’s decision to cancel buyer coverage during the lifetime of the policy.
The additional certainty provided by non-cancellable trade credit cover not only means that a company can protect its trade flows throughout the entire economic cycle, but enables it to stand by its customers during difficult periods.
This means its customer-base is more likely to remain intact – and its own sales recover quickly – once the trading environment recovers. We think now is the time for brokers to raise the benefits of non-cancellable solutions with their clients.
AIG’s non-cancellable trade credit insurance products allow policy holders to remain in control of their customer relationship and expand their sales while taking advantage of AIG’s A+ rating, plus its wealth of market intelligence, country knowledge, sector specialists and experienced underwriters.
We would welcome discussions with broker partners about how we can tailor bespoke solutions to meet your clients’ requirements, whether on an excess of loss basis for larger companies, or via our Trade + product for mid-sized companies.