Trade credit insurance is often over-looked when people think of world trade. Businesses must manage a range of risks on a daily basis.
The risk of non-payment of invoices is certainly one of the largest when it comes to the potential impact it has on the survivability of a business.
So understanding how trade credit insurance fits within this world and the scale of the protection it provides can help us to understand the challenges businesses in the real economy face and potentially address these.
What is Trade Credit Insurance?
At the core of all trade is a necessary balance of risk and reward. Will the product work? Will it arrive where it’s needed, when it’s needed? And will my buyer be able to pay? And with all risks, there are several ways to manage and mitigate these. Sometimes that involves bearing the risk yourself and paying for losses that arise. In other cases, insurance and other risk transfer tools may help to limit a businesses exposure to a particular risk.
Trade credit insurance, in its most basic form, is protection against the non-payment of trade receivables. In the context of the International Credit Insurance and Surety Association, the majority of protection provided by our members is short-term, whole of turnover protection. The relates to invoices with payment terms generally less than one year, but usually much shorter than this. An insurer works with a policyholder to assess credit limits that can be offered to their commercial customers. If that customer then cannot pay due to insolvency or protracted default, the insurer indemnifies the business against the loss.
This enables significant flexibility and ensures that businesses can free up cash to invest back into the business to grow and innovate. A credit insurance policy can also be used as security by the policyholder to access financing on potentially better terms due to the protection the policy provides to their cash flow. Banks too can purchase credit insurance on their clients to reduce their exposure to credit risk, enabling them to extend financing further throughout the real economy. Trade credit insurance is therefore a key cog in the machine of world trade. Keeping everything moving when things go wrong. But just how important is it, and what is its impact on world trade today?
Limitations of assessing the trade credit insurance market
Estimating the size of this market and the extent of the protection provided to world trade is not a straightforward task. Limited or partial access to data is the major block on this effort. The disparate nature of the sector also contributes and definitions for different elements can vary from company to company, as well as from region to region. Official statistics from regulators can also create ambiguity by pooling similar but different insurance lines together. Differences in public versus private sector sources are also taken into consideration.
ICISA began the process of estimating the impact of the global trade credit insurance market last year for the year 2020. We noted at the time the limitations of the approach and that there were certain gaps in our data. For that reason, we are not yet in a position to establish a consistent data set to compare year to year. Our latest efforts therefore focus on assessing the picture for the year ending 2022. Our approach today has also improved on some of the data points we used initially and as such, direct comparisons are not straightforward.
Due to those challenges, our data set primarily looks at what is generally considered the trade credit insurance market. This is made up of primarily short-term business, though not exclusively with a small portion of single risk business also included as it forms a fuller picture in this way. Our analysis also requires us to make certain assumptions about elements of the market, such as average premium rates, to derive relevant conclusions. While we cannot be perfectly accurate in this regard given differences seen throughout the world of trade credit insurance, we are comfortable that the outcome of our estimate is accurate to within a reasonable margin of error.
Estimating the impact of TCI in world trade
With those caveats and limitations in mind, what can be said about the size of the global trade credit insurance sector and its role in world trade? To begin with, we estimated the total value of world trade (imports and exports) based on the World Bank’s statistics. This gave us a value of World Trade in 2022 of USD 100.56 trillion from which to base our assumptions. Combining data from different sources in the insurance market, we derived a figure for global premium in trade credit insurance in 2022 of USD 13.89 billion.
Applying an average premium rate for different portions of this global premium volume based on assumptions about different sub-segments in the market, we then estimated the global value of insured shipments (shipments of traded goods for which trade credit insurance applied) in 2022 at just over USD 7 trillion. Based on our estimate of insured shipments, we can say that the penetration rate of trade credit insurance is therefore 13.16%. Based on the data available to us, we can also assume that 69% of this protection is provided by private market participants, with the vast majority of this being derived from among ICISA members.
These figures are in line with estimates of the global market that we have seen from other sources. And while our analysis produces a different result due to somewhat different approaches, this similarity gives us additional confidence that our results are indicative of size and impact of our market in the context of world trade.
What do these statistics tell us about the world?
These statistics indicate that the value our industry brings to the real economy is significant. However, they also clearly demonstrate that there is a significant gap in protection faced by businesses. This gap is likely to be borne by smaller businesses in particular, and will be greater outside of Europe where the product is less well established.
This is where our industry can continue to play its role. At ICISA we are working to build awareness of the role of our sector and working with others– including across public and private sectors – to address these gaps. To do this, we need to continue to help governments, regulators, businesses, financing institutions and society at large understand how our products work, and how our industry can help.