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Supply Chain Finance solutions remain key to trade and recovery

Credit, Political Risk and Terrorism
N/A

March 16, 2021

This article describes this asset class (and insurance), the nature of this area of the credit insurance market and the opportunities they provide for buyers and sellers

There has been significant recent press coverage of Supply Chain Finance (SCF) and Trade Credit Insurance (TCI), much of it negative following the recent demise of a high-profile provider of supply chain capital.

But as we look towards economic recovery, both SCF and TCI remain critical tools to help facilitate trade while providing needed liquidity and, to promote their wider use, it is important that the role of these products are understood. This article provides additional information on this asset class (and insurance) to help demonstrate the nature of this area of the credit insurance market and the opportunities they provide for buyers and sellers.

Background and explanation

SCF has become an increasingly valuable tool allowing corporations to monetize their accounts receivable by receiving early payment on invoices, while in many cases also providing extended payment terms to their customers. These programs help corporations manage concentration risks and mitigate unexpected payment issues and defaults. Today, many of the world’s largest banks have invested in Supply Chain Finance teams to manage these facilities.

The Role of Trade Credit Insurance

As in any downturn, liquidity is key to survival and having SCF programs established in stronger economic times may be a suitable strategy to sustaining a business through unforeseen downturns and difficult economic times.

Given the growth in SCF facilities, TCI has become increasingly important to both banks and asset managers (who also recognize the value of this TCI enhanced financing method). This has resulted in this area becoming a key growth area for the trade credit insurance market.

When deployed properly, a well-managed, well-structured SCF facility is the key to a sustainable and profitable insurance program allied with the trust and cooperation between the insured, the insurer and the broker in onboarding, maintaining, increasing, decreasing and managing credit limits. All parties need to fully understand the transaction, desired impact, and how they can come together to minimize losses when past dues occur. To aid banks in reviewing potential programs the International Trade & Forfaiting Association (ITFA) produced a 2018 paper which identifies some of the underwriting “red flags”.

Recommendation

We do not expect to see the market contract based on current events, but we do expect insurers to make program adjustments, whilst further developing their knowledge and widening their portfolio within this sector. As in any insurance line underwriters will focus on maintaining rigor and consistent underwriting will help to build sustainable capacity and more profitable long-term business. One of the key learnings from this recent episode is for the insurers to delineate the different approaches institutions may have when utilizing SCF.

Moving forward, Asset Managers and Financial Institutions will see closer scrutiny of their motivation for purchasing trade credit insurance. Institutions who continue to demonstrate credit evaluation rooted in fundamentals and using TCI as a risk mitigation tool first, and sales enhancement second, are likely to find a receptive insurer audience. In addition, banks who have historically purchased the product for purely Risk Mitigation or Capital Relief purposes are also likely to find continued support from the TCI insurance market.

In comparison, a new market entrant who deviates from these fundamental elements will likely find it much harder to secure trade credit insurance capacity. Furthermore, where there is insurer interest, greater scrutiny will be applied to understanding the dynamics of the parties (the insured, the buyers, and the seller) as they establish these programs and policies.

Conclusion

Whilst the consequences and repercussions of recent events will continue to run their course, we believe that SCF and TCI will remain critical tools for trade and economic recovery. But it is worth remembering that ambitious growth goals, without best practice, may create an exposure to much higher risk and a subsequent dilution of credit quality.

Going forward, we see the choice of an experienced broker partner to be even more important to both financial institutions and asset managers as they seek to build sustainable, balanced TCI solutions which will enhance and compliment their SCF facilities and objectives.

Contact

Scott Ettien
Global Head of Trade Credit

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