Commercial Credit Insurance

Trade receivables for deliveries and services are an essential item on a company's balance sheet. The default risk of these receivables is now coming under the spotlight. Entities publishing in accordance with the International Financial Reporting Standards (IFRS) have, since the beginning of this year, been required to adhere to new accounting rules. They now have to evaluate, in balance sheet terms, the default probability of their credit risks for the next twelve months.

Market Situation

Even if companies rate the risk of non-payment of their receivables as "low", they are increasingly being asked to assess their portfolio risk and provide adequate collateral. Companies reporting in accordance with IFRS have to maintain models that also include a default risk forecast for the coming twelve months. Even for compliance reasons, credit and receivables management processes should be designed to ensure that supplier credit risks are recorded and optimally insured. Against this backdrop, the following aspects are becoming more and more important for the companies concerned: damage due to irrecoverable receivables for deliveries and services is not the result of default only. Loan losses due to subsequent insolvency contestation or increasingly frequent fraudulent purchase orders also have to be taken into account. Accordingly, processes have to be defined and provided, according to which decisions on the crediting of receivables can be formulated clearly and precisely. A major instrument for hedging receivables for deliveries and services is the conventional commercial credit insurance policy. However, there is also a large number of companies using factoring or guarantee insurance policies to minimise their default risk.

Outlook

The commercial credit insurance market in Germany is only showing growth in the guarantee and fidelity insurance segments. With regard to commercial credit insurance, the picture is the same as in recent years: there is a high risk for insurers offering coverage at low premiums and managing a virtually consistent number of policies. On the one hand, this reflects the economic situation in the German market and, on the other, shows that the companies' requirements for collateral have changed. As risk analysis is generally becoming more important and adequate hedging opportunities are sought, focus is turning to solutions that go beyond the concept of conventional commercial credit insurance. Fidelity insurance, for example, closes the gap between commercial credit insurance and cyber insurance.

Market Trends

The insurance market is responding to changing customer requirements: There is a trend towards increasing efforts to design commercial credit insurance policies that meet the requirements for genuine receivables collateral. "Noncancellable" insurance policies are of particular interest in this context. They basically mean that the insurer may not cancel a maximum credit amount granted to a corporate client before the end of the insurance period. Furthermore, there are first insurers offering combined products such as combined commercial credit, contestation and fidelity insurance, in an attempt to provide comprehensive cover for trade receivable portfolios.