Trade credit insurance provides risk protection for international trade. They pay off trade debt, mostly in part, if the buyer is unable to settle it due to default, insolvency, or delayed payment.
Most companies choose to self insure, by having a reserve on their balance sheet just in case something goes wrong. That is an inefficient practice. It's better to purchase credit insurance and use the excess capital to invest in the company's growth.
Considering the turmoil currently being inflicted by the concurrent crisis of the CoronaVirus outbreak and the oil price war, many businesses may falter. Global markets have fallen, which affects the solvency levels of companies. Supply chains, particularly in China and Italy, have ground to a halt, which will affect a business's ability to generate revenue and pay suppliers.
Changing Trade Landscape
The trading environment of 2020 will be substantially different from that of 2019. 2020 will see:
Small Businesses Will Become More Prominent in International Trade
International trade has mostly been made by large, well-resourced, and well-supported businesses. The internet has disrupted this notion and brought small businesses into international trade. Small businesses are now able to sell their goods across borders with ease.
A lot of these small businesses are performing international trade with little to no financing or protection. Either the transaction amounts are too small for letters of credit, or the process is too cumbersome.
According to the World Economic Forum (WEF) of the total global trade worth US$27tn in 2020, only about US$5tn will be funded by traditional trade finance instruments like letters of credit.
Smarter Trade Insurance
Technology will continue to drive the credit insurance market to become more efficient and cost-effective. Data processing, analyses, and machine learning will make underwriting systems more accurate in determining risks. Automation will also make underwriting more productive and cheaper.
B2B marketplaces are not only gaining traction but are also increasing their service offerings. Trade finance and insurance are becoming an extra service that B2B marketplaces offer their users, who appreciate finding all their trade needs under one roof. So credit insurance companies will either be forced to work with B2B trade hubs or watch those platforms develop their services.
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A report suggests that the Global Credit Insurance market is expected to grow at a CAGR of 2.15% from 11 billion USD in 2017 to reach 12.5 billion USD by 2023. This will be driven by uncertainty in world markets, shifting trade winds, and the rise of small businesses in international trade. Exports News is here to provide you with the latest on this evolving story – subscribe to stay informed.
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