The recent developments in the food and beverage market, particularly in regards to trade credit insurance, provide insight into the significant trends and challenges that businesses are currently facing on a global scale. According to Allianz Trade, there has been a noticeable surge in global insolvencies, with major economies such as the U.S., Canada, France, and Japan experiencing a 30%+ increase, and this trend is expected to continue in 2024. As a result, trade credit insurance has become increasingly crucial in managing financial risks.
In the UK, the Insolvency Service reported a 5% increase in insolvencies during Q2 2024 compared to the same period in 2023, surpassing the levels observed during government support measures and pre-pandemic figures. This rise in insolvencies led to a 23% increase in insurance payouts in the first half of 2023, totaling over £100 million, as reported by the Association of British Insurers (ABI). The ABI also noted a 54% rise in new claims during the same period, highlighting the growing significance of trade credit insurance in today’s volatile economic climate.
Despite these challenges, the food and beverage sector continues to attract trade credit insurers, especially in areas where businesses can pass on the costs of inflation, higher interest rates, and energy price volatility to customers. However, capacity issues are becoming more pronounced in heavily insured segments like wholesalers and grocers, indicating potential challenges ahead.
Trade credit insurance policies are evolving to address these challenges. Policies that offer non-cancellable credit limits and greater policyholder discretion, such as excess of loss solutions, are gaining popularity. Moreover, the market for top-up providers, who offer additional coverage for existing policies, is also experiencing significant growth. These policies help cover gaps that might occur due to new business acquisitions or inflation-driven increases.
Businesses are now leveraging trade credit insurance to gain a competitive edge and expand into new markets with reduced financial risk. The insurance also facilitates improved funding terms by securing a company’s trade receivables, which appeals to banks and financial institutions.
In addition to risk management, trade credit insurance supports supply chain finance programs, which offer early settlement options based on the financial strength of the purchasing company. This arrangement provides suppliers with better terms, enhancing the overall efficiency of the supply chain.
In a recent WTW podcast, the CFO of Lincoln Provision emphasized the indispensable role of trade credit insurance in managing credit risk and ensuring financial stability within the food industry. This sector, with high credit risk and tight margins, relies heavily on trade credit insurance to mitigate potential losses from customer insolvency or non-payment.
Trade credit insurance is particularly vital for businesses dealing with international customers, providing a safety net in unfamiliar markets and helping them navigate the complexities of international trade. It also supports financing activities by making international receivables eligible for advance within lending programs, enhancing the financial flexibility of businesses.
Another significant benefit of trade credit insurance is its ability to increase sales and manage capacity. It provides businesses the confidence to extend credit to new customers and pursue larger sales volumes without compromising their risk exposure. Additionally, collection services included in trade credit insurance policies help recover outstanding debts, reducing the financial impact of non-payment.
Overall, trade credit insurance remains a vital risk management tool for businesses, particularly in the food and beverage sector. It not only serves as a safety net against potential losses but also facilitates credit management, financing activities, and capacity management, providing businesses with the necessary protection and confidence to focus on growth and financial stability. If you’re looking for smarter ways to manage credit risks and opportunities, trade credit insurance might be the solution for your business.