Trade credit insurance is a very important credit risk management tool, especially in Europe. Spain is even the country in the world with the highest penetration rate and it is also very strong in Germany and France. It is not a coincidence that the world's biggest players are based in Europe - Euler Hermes, with French-German roots; Atradius, now owned by a Spanish Insurance Group, but roots back in Germany, Belgium, and the Netherlands, and Coface which until recently was entirely French.
Trade credit insurance aggregates three major services: business information, debt collection and indemnification.
Regarding business information, in the first article in this series we have already talked about this service, so we will not repeat ourselves. Regarding debt collection, it consists in the service of recovery of credits, under the trade credit insurance policy, which have not been paid, where the insurer is subrogated to the rights of the insured and proceeds to its amicable recovery and if necessary judicial.
Finally, indemnification, which is the core of this insurance, consists in indemnifying the insured for covered credits up to the credit limit defined by the insurer. This means that: at the beginning of the contract, the credit insurer performs a risk analysis of the Insured's client portfolio and for each client establishes a credit limit that must be respected by the insured when selling on credit (this credit limit corresponds to the amount the insurer considers the most appropriate for credit sales, based on business information and other data available on the company) and undertakes to indemnify, in the event of default or insolvency of the insured, a percentage on the credit up to the defined credit limit, which generally varies between 80%-90%; the insurer monitors and alerts the insured to any occurrence in its client's business and in the event of non-payment acts to recover the credit and proceeds to the respective indemnification.
It should not be left unsaid that in addition to the percentage not covered by the insurer, between 20%-10% of customer’s credits, may also be the excluded of the credit coverage for clients with no credit limit - it is true that the reason may be the economic-financial fragility of the companies and is a warning for the insured not to risk and focus their sales to other companies with a healthier situation, but there may be other reasons, related to the size of the company or its sector, among others.
Trade credit insurance, which has more than 150 years of history, is undoubtedly a powerful tool in the domestic market, but even more important when exporting, since in the markets where they operate, insurers have local teams that provide all these services to the insured, helping them to know the market, manage their prospects and their clients. The three major credit insurers worldwide have a global coverage, others, already with some dimension, are more present in specific regions.
With all these advantages, trade credit insurance is one of the most important tools in credit risk management for companies. However, it is very much focused on large and medium-sized companies; that is, micro and small companies cannot easily access this service - for reasons of price, acceptance rate over their client portfolio, or even the administrative complexity of managing the service with the insurer, among other reasons.
The main credit insurers have implemented new solutions to meet the SME segment, but the market has not been very receptive.
So, the questions that arise are, how can credit insurers extend their support to micro and small businesses, and how can credit insurers continue to facilitate credit risk management for the insured's clients who have no credit limit?
For both questions, and in line with what we have already discussed about Barter, we believe that a close relationship between credit insurers and the Barter model would have unequivocal advantages, not only for micro and small businesses, but also for existing trade credit insurance clients.
Trade Credit Insurers have concrete information about the behavior of companies in their commercial transactions, enriching the information made available. They can monetize new business relationships between entities that are part of their databases, insureds, and the clients of the insureds and increase revenues by providing new services to companies. They add value to the economy by facilitating commercial transactions between companies, many that by their size, are on the margins of traditional financial/insurance products. There is no need to reinsure the Barter operations, nor to constitute obligatory provisions in accordance with the legislation in force for the insurance/finance sector, since Barter is a service.
Companies in general discover an additional channel for gaining and maintaining business, providing solutions for companies in the micro and small business segment, who have not benefited from access to trade credit insurance. They access to a tool that allows them to make secure transactions without fiat money, which results in saving Euros and improving cash flow, as well as a a credit risk management solution for non-covered Clients.
As we have seen previously, in the articles already published, there are similar characteristics between the Barter model and trade credit insurance:
- Both analyze and monitor the credit risk of companies,
- Both mitigate credit risk, where in Barter a company sells and automatically receives the credits corresponding to the sale made without having to wait for the receipt in fiat money and can immediately use these credits to make purchases on the platform,
- Using Barter, there is therefore no need for credit recovery or compensation, and the seller still receives the value of his credit at the time of sale.
There are numerous potential synergies between these two activities and in all new markets where Bartercard intends to install itself in continental Europe, there is already the presence of credit insurers with fully equipped teams and a commercial network that knows and accompanies their clients, allowing a rapid dissemination of this new service. Moreover, if credit insurers were to add the Barter model to their service portfolio, actively promoting commercial transactions (not only among their clients, but potentially with all the companies in their databases), the additional business potential and advantages for all involved would be immense.
Trade Credit Insurance companies could make use of all the tools from Bartercard to launch this new line of business quickly and successfully, such as a business transaction management platform, a mobile and web platform for customers, a directory of goods and services offered by member companies, training and support from Bartercard Europe and Bartercard International, and support in operationalization and credit risk management.
A close collaborative relationship between Bartercard and the credit insurers brings these and other advantages to all stakeholders and allows us to extend the provision of a complete credit risk management service to micro and small businesses, which have not had this type of solution at their disposal.
For us, it is one of the fastest and most effective ways to launch a Bartercard in each European country.