Trade Credit Insurance – Protection, Economic Instability and Increased Demand

What is Trade Credit Insurance? 

Trade Credit insurance provides cover for businesses, such as manufacturers, service providers and traders, against the risk of not being paid for the goods or services sold by them. This offers a level of protection in business-to-business supply chains in events of nonpayment of commercial debts. Without this protection, businesses are at risk of being exposed to costly bad debts. 

Non-payment of debts can be for a number of reasons, the most extreme being due to the bankruptcy or insolvency of the debtor. 

What’s the risk of non-payment? 

In any business to business supply chain there is a risk of non-payment of debts. The current economic climate, including higher interest rates, rising inflation and many businesses still feeling the legacy of the Covid-19 Pandemic, has heightened the risk of non-payment across all trading industries, with tighter cash flows all round. 

According to the Company Insolvency Statistics published by the Insolvency Service on 30 January 2024, the number of companies that went bust in England and Wales last year hit a 30 year high with more than 25,000 companies registered for insolvency. Wilkos was among one such fallen retail giant.

The latest reports of the UK economy falling into a ‘technical’ recession in the final quarter of 2023 suggests that this trend may not be going anywhere any time soon. With UK GDP having fallen 0.3 per cent in the final three months of last year. This comes in the backdrop of high interest levels, with higher cost of borrowing, higher levels of inflation and weak consumer and business confidence. 

This is a trend not just affecting the UK trade but global trade. With a number of high profile US retailers filing for bankruptcies and the impact of the Covid-19 pandemic on global supply chains continuing to be felt, Trade Credit Insurance is being relied upon and called into action more than ever. 

Increased Demand 

In the midst of business uncertainty and economic instability being felt by businesses across the UK and globally, Trade Credit Insurance and Insurance payouts for trade credit are on the rise. According to the Association of British Insurers, insurance payouts to help businesses survive bad debts rose by 23% in the first half of 2023 with retailers and businesses in the construction industry relying heavily on this as a mitigation of credit risk. 

With economic uncertainty set to continue, so it seems will the demand for trade credit insurance but is it a fool proof solution and what are the risks? 

Is it ever that straight forward? 

In the ordinary course of trade, products and services would be provided, invoices paid, cash flow reinvigorated and insurance premiums duly paid out for ‘the worst case scenario’. 

However, with the rise of reliance on Trade Credit Insurance and notwithstanding the increased number of payouts, the number of coverage disputes are on the rise too, typically concerning misrepresentation of the risk and complying with notification conditions. With an ever increasing risk profile (and Covid-19 amongst the culprits for this), a number of insurers have found themselves facing claims of several hundred millions of pounds. Brokers have also found themselves embroiled in the minutiae of these claims. 

Insurers concerns? 

The challenge for both insurers and brokers is to evaluate the risks and get the pricing right when placing this business. 

The ongoing litigation between Zurich Insurance Company and the Greensill Bank administrators is a case in point. Zurich found itself on the wrong end of a trade credit insurance law-suit last year in the English Courts brought by the administrators. In January, Zurich counterclaimed  Greensill, Lex Greensill and Sanjeev Gupta, alleging that the claims made on the policy arose out of a fraudulent scheme. Insurers across the UK and globally will be watching this space with bated breaths as issues of deliberate or reckless misrepresentation and non-disclosure are debated in the English Courts. As most trade credit disputes are settled amicably or following confidential arbitration, there is only limited available case law in the UK. Greensill will change that. 

Conclusion 

With the trade associated risks increasing, insurance cover for such risks is now essential for anyone exposed to supply chain problems. But what can businesses do to safeguard the cover they have purchased so that their claims are not rejected for technical breaches? Well, it is the same as with all insurance policies because the devil is in the detail. Insurance policies contain complex and often specific disclosure requirements, claim conditions, notification requirements and time limits. 

• On inception, renewal and any change in circumstance or scope of a business, attention must be paid to the disclosure requirements. 
• Businesses should familiarise themselves with the notification requirements, so they are aware of what in their business may constitute a ‘circumstance’ and know to push the button and notify insurers. 
• Don’t lose sight of the deadline – while considering disclosure requirements, claim conditions and notification requirements, don’t forget that time is probably of the essence. 

If you would like more information on declinature of cover and/or disputes over insurance coverage for any insurance policy, please get in contact with Manoj Vaghela or Mary Barrett.