Trade Credit Capacity an Issue? Consider a Captive

An increasingly challenging insurance market, further complicated by the ongoing pandemic, is leading more organisations to explore using a captive insurer for trade credit coverage. The number of captives writing trade credit increased by 14% between 2018 and 2019, a period that also saw an 86% increase in trade credit premium volume written through captives. While data is not yet available for 2020, indications are that this trend continued.

As more insurers pull back on trade credit capacity, raise prices, and become more reluctant to take on new risks — particularly in sectors heavily impacted by COVID-19 — it is becoming more difficult for organisations to secure customary levels of coverage. When coverage is available, it is often more costly, pushing organisations to explore alternative ways to secure needed trade credit insurance.

For organisations with an established captive that is successfully used for other lines of coverage, adding a trade credit program can be relatively straightforward. A captive is often utilised to front the primary portion of risk, which typically puts captive owners in a more favourable position when negotiating with commercial trade credit insurers.

Increased Recognition of Captive Benefits

Insuring trade credit through a captive requires unique expertise. Captive owners are, at times, reluctant to take on what they perceive to be a complicated claims administration process and demanding underwriting requirements. However, as the insurance market becomes more challenging, past reluctance is slowly being replaced by a recognition of the benefits that captives can offer when partnered with the right trade credit insurer and policy structure. Key benefits include:

1. Cost savings. Especially when a captive is already in place, the costs to expand its scope to include trade credit is often minimal. Over the long run, an organisation with a good performing portfolio is likely to save money by using a captive and holding on to underwriting profits that would normally have gone to a third party.
2. Greater flexibility. Captives rarely insure an organisation’s entire trade credit portfolio, and are instead used to enhance capacity or improve the insurance offering. For example, multinational organisations often have global subsidiaries with differing risk tolerances and objectives. A subsidiary that prefers a low or no deductible policy might find coverage unavailable or too costly. A captive can cover the deductible required by the insurer, providing the subsidiary with the desired low deductible option.
3. Create more insurance capacity. Most insurers pulled back on trade credit insurance capacity in 2020 as the pandemic permeated global economies. Retail, energy, hospitality, and transportation companies were among the hardest hit, and insureds in those industries often struggled to secure coverage. By using a captive to take the first layer of risk, companies can make themselves more attractive to otherwise reluctant insurers. Insures will often be more willing to take on a risk when a captive is involved because they are further removed from the initial loss layer. This creates otherwise nonexistent capacity for the insured.

While the process of insuring trade credit through a captive can seem complicated, an experienced broker can help companies find the right structure and relationships to address the underwriting challenges that a captive can face with trade credit insurance.