Trade credit insurance has long been the domain of specialist brokers but changes in business practices are opening up new potential clients to general commercial brokers.
At its simplest, trade credit insurance (TCI) ensures businesses that sell on credit can recover their debts if a buyer becomes insolvent, whether through receivership, liquidation, administration, bankruptcy or protracted default.
QBE Australia Credit and Surety General Manager John Sutherland says any business selling on credit should consider TCI, whether it’s simply for peace of mind, protection of cashflow or to safeguard receivables for funding purposes.
Sutherland notes that manufacturing, agricultural and pharmaceutical companies, in particular, could benefit from using trade credit insurance in the current economic environment.
A typical trade credit insurance policy will pay out 90% of the debt to an insured supplier of goods and services in the event of insolvency.
In the past, the main target market was suppliers and exporters of hard commodities and manufactured goods.
This has changed in recent years, says Kirk Cheesman at NCI, the country’s largest specialist TCI broker.
“We’ve got labour hire businesses, electronics, advertising, technology – anything that’s sold on trade credit can be covered, except for financial services,” he says.
Despite seeming ready-made for export markets, trade credit insurance has not been widely used in Australia and Asia, nor well understood, despite the efforts of the dominant local player QBE and other global specialists with a strong local presence, such as the European firms Atradius and Coface.
The French-owned Coface has been pushing for a larger share of the Australian market for the best part of a decade.
According to Paul McGahen, Chief Executive of the group’s Australian business, the sector with the greatest expansion potential is among exporters.
“I’d always advise someone exporting for the first time, or expanding off a small export base, to give trade credit insurance some serious consideration,” he says.
David Huey, Managing Director of Atradius Oceania, the regional operations for the Spanish-owned global group, says slow progress in take-up does not mean his firm is standing still.
He notes that with trade borders coming down, and businesses in Australia and Asia wanting easier ways to support exports, demand will come.
“We will cover anybody who trades on open terms; I’ve got international commodity traders sending coal and other hard commodities to China and the US, right down to SMEs selling food to McDonalds,” Huey says.
However, more than 80% of the current Atradius book in Australia is domestic.
“It’s just as risky sending your widgets to Parramatta as it is sending them to Vanuatu,” Huey says.
Small businesses, large prospects
The small business sector is universally seen as the next growth area by major players in the trade credit insurance sector.
And it’s here that general insurance advisers can play a big role in ramping up business.
If you look at it seriously, it’s more likely that one of your debtors Is going to go broke than your building will burn down.
“The SME market is an area that has never really been adequately catered for in terms of product and price. With investment in technology and automation, however, there is scope to provide a variety of products to SMEs at an effective cost,” QBE’s John Sutherland says.
Earlier this year, Atradius launched a new trade credit insurance policy aimed purely at SMEs.
Called Modula First, the product is available to businesses with insurable turnover of less than $5 million, and offers liability options of up to $200,000.
Atradius New Business Head Paul Daniele says more brokers will begin paying attention to trade credit.
“That’s where the carrot is for the general insurance broker – ensuring that they’re providing a full level of cover for the entire asset base of their SME clients,” he says.
However, NCI’s Kirk Cheesman warns that TCI is still seen by Australia’s businesses as a discretionary spend, even though trade creditors account for a much larger proportion of most firms’ balance sheets than their buildings or cars.
“If you look at it seriously, it’s more likely that one of your debtors is going to go broke than your building will burn down,” he says.