With changes in the economic environment, it is important to understand how businesses with trade credit exposures can be affected. This article covers the present trade credit climate, an example of how this insurance can protect your business, as well as an outline of key industries considered to be at a greater risk.

This article was developed by CBN partner National Credit Insurance (NCI). For further information or tailored advice for your business, please reach out to a CBN authorised broker.

What is Trade Credit Insurance?

In the current climate, assessing a business’ financial viability has become increasingly challenging. Trade Credit Insurance is designed to protect a business against the risk of debtor non-payment and insolvency.

What’s happening in the world of Trade Credit Insurance?

COVID-19 has changed life in the short term for many businesses, this includes trade credit.

Trade Credit Insurance has experienced a wave of uncertainly in both domestic and international insurance markets. This, coupled with fast-paced changes in government legislation, makes it challenging to predict when and how the economy is going to bounce back.  Embattled Australian department store retailers David Jones and Myer are indicative of this trend, with the two high profile organisations reportedly subject to a reduction in cover from the middle of July (read more).

How can trade Credit Insurance protect your business?

Example:

Jane is a timber supplier, providing goods to the building industry. Jane supplies $100,000 worth of timber on 30-day terms to XYZ Timber Pty Ltd. Under her Trade Credit Insurance policy, she has a $5,000 excess and a 90% indemnity rate, and pays a premium of 0.22% on her total sales. Unfortunately, XYZ Timber Pty Ltd has entered external administration. Jane has no recoveries and is now facing a $100,000 loss. Fortunately for Jane, she has her Trade Credit Insurance policy which was in place prior to delivering and supplying these goods.

Jane has a “whole of turnover” Trade Credit Insurance policy, which thankfully means all her trade credit sales are insured providing they’re endorsed under the policy. At a premium rate of 0.22%, the cost of insuring this individual sale to XYZ Timber Pty Ltd averages out to just $220. So, in this instance it’s cost Jane $220 and she can now make a claim for $100,000 under her policy.

In this specific case, Jane’s return is around 35,000% more than the cost of insuring the debt. If Jane hadn’t been proactive in taking out Trade Credit Insurance, she would have needed to sell an additional $1,000,000 worth of goods (assuming a 10% profit margin) just to recoup her loss.

Although this is a simplistic example, it clearly highlights the financial protection offered by Trade Credit Insurance, particularly when the policy is broken down on an individual invoice basis.

When viewed in this light, it wouldn’t take much effort to incorporate this small premium cost into your sales fees moving forward. This would minimise the premium cost for your business, while providing greater security.

The availability of Trade Credit Insurance in Australia

Currently there are 5 main trade credit insurers in the Australian market, all of whom have different risk appetites on what they are willing to insure in the present economic climate. With many businesses at a greater risk of defaulting on payments, Trade Credit Insurance claims are becoming increasingly common, putting insurers’ own profitability at risk.

Accordingly, one insurer has made the decision to stop quoting on any new business, whilst others have become more conservative as market capital, or ‘capacity’ dries up. Their aim is to protect current portfolios, preferring to only insure the slightly better-known risk of existing clients, over the many unknowns that may be presented by new clients.

Industries currently considered by insurers as high risk are:

• Manufacturing
• Retail
• Logistics
• Travel
• Hospitality
• Building and construction
• Automotive

If your business falls in one of the above categories, don’t be deterred. High risk doesn’t necessarily mean there is no capacity to purchase insurance, it just means that the risk will be priced accordingly. Some policies have had their premium rates increased only slightly, whilst others have increased by 10-25%.

What’s on the horizon for Trade Credit Insurance?

With the Australian economy experiencing 2 quarters of negative growth and another one on the horizon, the insurance market for Trade Credit policies will likely only become tougher.

To make matters more challenging, new debtor management laws are being introduced. This will see:

• the minimum amount owed to a creditor increase from $5,000 to $20,000, before being able to commence the winding-up process,
• the time a business must respond to a warning about an overdue debt, increase from 21 days to 6 months.

Unfortunately, these changes make cashflow management increasingly difficult for creditors, and perhaps mask ASIC insolvency statistics, which are at present some of the lowest on record.

However, with many businesses due to come off government assisted financial lifelines in a couple of months’ time, the current economic bubble may burst, and the rate of insolvencies skyrocket. One insurer has recently stated an expectation of a 53% rise in insolvencies in 2021 compared to 2019.

Ensure your business is protected against the risk of customers becoming insolvent. 

For professional insurance advice, connect with a CBN Authorised Broker.

Connect with a CBN Broker

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