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- Trade credit insurance absorbs some of the risks of trade, allowing networks to continue operating smoothly.
- ICISA’s report details that, contrary to the perception that TCI is state-driven, 72% of short-term coverage is provided by private entities.
- However, its reach is uneven across different regions.
A critical sector, but unevenly spread
The International Credit Insurance and Surety Association, ICISA, estimated that 15.07%, or €8.5 trillion, of global trade in 2023 was supported by short-term trade credit insurance (TCI) in some form. With a total value of premium in the global trade credit insurance sector in 2023 reaching over €15 billion, the sector plays a critical role supporting trade around the world.
ICISA’s study indicates that 72% of short-term cover comes from private sector capacity, contrary to the common perception that this is largely driven by state support. ICISA’s analysis demonstrates a competitive and innovative sector that works in combination with public and private financing, as well as state-backed coverage for risks of different sizes and tenors.
The latest analysis of the role of trade credit insurance in world trade assessed that almost €8.5 trillion worth of shipments are insured based on estimates of world trade value. This represents a penetration rate of just over 15% of all world trade being protected by trade credit insurance. This is up two percentage points from last year’s figure of 13%, showing that the industry is both growing healthily and expanding to new markets. However, it also demonstrates that in an uncertain geopolitical and economic landscape, companies are turning to the insurance industry to mitigate risks amid expectations of losses.
With a rising proportion of world trade protected by trade credit insurance, the sector is playing a significant role in improving the resilience of global commerce. Anecdotal evidence gathered as part of this study indicates that penetration of TCI is highest in advanced markets in Europe and Australia, with North American markets showing persistent steady growth. However, much of the developing world remains behind, and access to specialised financial services in emerging economies remains a challenge. Digitalisation efforts on electronic trade documents and paperless customs processes could help to bridge this gap. These technological developments may support the deepening of trade, as well as the creation of new, more secure data points. With more information to make underwriting decisions, companies in emerging markets may find it easier to obtain coverage.
Non-payment of invoices, whether in domestic trade, export to neighbouring countries, or international trade, can be devastating for businesses. Such events, often caused by external factors, can lead otherwise healthy companies to face severe financial issues and even bankruptcy.
Trade credit insurance plays a crucial and little-appreciated role in protecting businesses from these risks, making the world of trade keep spinning. Trade credit insurance acts as an important buffer between businesses and their buyers and suppliers, absorbing the risks of trade and removing the danger of missed payments.
ICISA’s report and methods
ICISA used its unique position as a major insurance association, representing 92% of the trade credit insurance company market by gross written premium volume, to gather data about the industry and its impact. ICISA used interviews, desk research and their internal database to estimate the impact of trade credit insurance globally. This was then compared to an estimated total volume of world trade for 2023 based upon statistics publicly available from the World Bank.
Trade credit insurance: crucial protection for businesses
Trading goods is inherently a complex and risky process involving many moving parts and uncertainties. Goods travelling a long way, often through a combination of air, sea, and land routes, could be lost, delayed, or damaged during the process; buyers could default before they have a chance to pay invoices or pay them late; tariffs and border controls could hold up the goods and lead to heavy fines; and any other unpredictable event could happen anywhere in the process. There are a range of ways to mitigate these risks: buyers may try to absorb them themselves, but this can be dangerous and leave suppliers vulnerable to missed payments and default.
Risk transfer tools like trade credit insurance can help limit business exposure to these risks. In its most basic form, trade credit insurance is protection against the non-payment of trade receivables: if a business does not get paid by its customer due to insolvency or protracted default, the insurer pays back the supplier, enabling activities to go on as normal. Insurers work with businesses to assess risks and define the level of protection; most of ICISA’s members offer short-term (i.e. tenors of less than two years under OECD definitions, but in practice, usually less than 90 days) protection to policyholders, who then set credit limits on buyers. Protection is usually offered on a short-term basis for the whole of a policyholder’s turnover. However, individual protection policies on single transactions may also be purchased. This protection may also occur on the basis of longer tenors than standard TCI policies.
Being protected against non-payments gives businesses much more flexibility to keep less money in reserves and invest back into increasing output without worrying about cash flow. Businesses that have credit insurance may also find it easier to access external financing and banks can, in turn, purchase credit insurance for the receivables that they acquired from their clients to provide more financing safely. Having insight into the trade credit insurance market is essential to understanding where this all-important industry is heading and what can be done to support it.
More insurance for a more fragile world
As the global outlook becomes more and more uncertain, demand for trade credit insurance will continue to rise. Geopolitical disruption in the Middle East and globally, continuing pressure on supply chains, and fears of trade wars and tensions could create challenges in the market, while also pushing companies to seek more protection from risks.
The rising awareness of the need for competitiveness in Europe, as the region sees itself outpaced by China and other rising economies in key industries and faces heavy tariffs by the US, could also highlight the need for trade and the crucial role trade credit insurance has in facilitating it.
