Trade Credit Insurance (TCI) provides protection against the risk of non-payment of trade receivables. It is used by companies of all sizes for this purpose - from SMEs to multinationals, from corporates to financial institutions. With protection against non-payment in place, companies gain confidence to invest and grow their business sustainably. Many companies also use TCI to improve access to finance, and this is particularly true for SMEs. By substituting the default risk of a company’s trading partners with that of a highly rated insurer, banks and other financial institutions can supply financing to protected businesses at greater volumes, or on better terms.
The SME segment is the core of the economy, and its success directly contributes to economic success and the overall wellbeing of society. Governments today are actively developing policy to support SMEs as a way of boosting productivity, innovation, and growth. This paper highlights the key role TCI already plays in support of these businesses, and offers recommendations to policymakers, regulators, insurers, and to SMEs themselves to benefit further from its protection.
TCI is usually purchased on a whole-turnover basis – meaning that protection is provided to a business across its entire portfolio of commercial buyers. Protection usually applies for short-term trade, which is the most common form of commercial trade between businesses. This means invoice periods of less than two years – and usually less than 90 days. TCI cover applies to both domestic and export transactions. In addition to non-payment arising due to the insolvency of a buyer, protection can also be given against a range of political risks causes, such as war, contract frustration from public buyers, or currency restrictions.
SMEs in developing and developed countries face a significant barrier when accessing finance. Driving this gap is both the perceived vulnerability of SMEs to external shocks, and the related cost of servicing customers with lower relative value. The inability to access financing impacts SME resilience greatly; undermining their ability to invest and grow. TCI can play an important role as one of the tools to unlock finance to this critical segment. However, further work is required on key challenges to improve this.
SMEs already comprise a significant portion of policyholders for trade credit insurers, particularly in advanced economies with well-developed distribution networks. However, there is room for growth in support of this segment. This paper explores these in more detail. New technologies, including advancements in AI, have the potential to decrease cost and resource constraints for managing policies. At the same time, improvements in the availability and reliability of data, as well as access to reliable repositories enhances the ability of insurers to assess risk. Clear insolvency laws and efficient court proceedings, and other disputes which may arise are also essential to expand access to TCI in developing markets.
The TCI sector is ready to build on its current role in the economy and support wider efforts to boost the SME segment. To achieve this, the International Credit Insurance and Surety Association (ICISA) makes six recommendations to policymakers to further enable TCI providers to support SMEs, and to enhance the effectiveness of this tool for smaller businesses. These recommendations apply to both developing and developed markets, with some more relevant to one than the other. These are:
- Enhancing understanding of TCI among regulators and policymakers.
- Progressing adoption and acceptance of trade digitalisation (and other technological advancements in support of trade and commerce).
- Promoting improved financial risk management practices among SMEs.
- Maintaining functional and effective insolvency legislation backed by transparent and efficient court-systems.
- Creating and advancing systems of legal identifiers for companies.
- Improving regulations applying to the use of TCI.
Further detail on each of these recommendations, as well as a discussion of the challenges and opportunities associated with providing TCI to the SME segment, is provided in the full paper below.
Source: ICISA
Write a comment