Export trade credit insurance can be a company's smartest buy—aproduct that absorbs the cost of deadbeat debtors. The insurancecovers credit risks caused by the default, bankruptcy or insolvencyof a buyer's customers, up to a stated financial limit. All welland good, except when the insurer midway through the policy periodcancels the limits of financial protection.

This was the unfortunate situation many policyholders fell intofollowing the financial crisis that reared in 2008. Not that theinsurers did anything wrong since the policy contract wordingclearly stated that they could cancel the financial limits with a24-hour notice. The reason for the cancellation is the insurer'ssense that a customer's buyer is suddenly an excessively highcredit exposure. The policyholder must now bear this risk on itsown balance sheet.

No figures exist on how many policyholders received suchluckless news, but it was likely more than a few, given the deeprecession that ensued. The limit cancellations resulted in whatScott Ettien, senior vice president, trade credit and politicalrisk, at insurance broker Willis calls a “black eye” for theinsurers providing the cancelable limit coverage, despite thelegality of their decisions. Combined with higher prices for theinsurance, insurance premium volume fell precipitously.

Now it's a different story, however. Perceiving a marketopportunity, more than a dozen insurance carriers have entered theexport trade credit business with a new non-cancellable limitpolicy. And the three insurers providing the cancelableproduct—Euler Hermes, Atradius and Coface—have added anon-cancelable financial limit solution to their lineup, aswell.

This enhanced competition and liberalized coverage haveculminated in a buyer's market, according to Ettien, who formerlyworked at Atradius. “It is a very soft market right now, with manynew insurer entrants,” he adds. “Policies can be customized tobuyer needs. Consequently, we're seeing much higher volumes ofbusiness.”

With regard to this, Baltimore-based Euler Hermes, part of thegiant German insurer Allianz Corporation, recently unveiled a wayfor its insureds to increase limits beyond their existing policies.“Say we provided $2 million in limits to a customer, which is aperfectly fine limit during most of the year,” said Jochen Duemler,Euler Hermes, CEO for the Americas.

“During the holiday season, however, this customer's businesspeaks to $3.6 million, requiring higher limits for just thisperiod. To save on the premium, the customer doesn't want $3.6million in limits for the full year. But, it definitely needs morecoverage at Christmastime. We are now able to write a second policyto absorb the additional $1.6 million in credit risk during thethree-month period.” The product is called CAP.

Euler Hermes also has put on the shelf an excess of loss policyfor insureds wanting to retain a significant portion of firstdollar credit losses internally. The insurance would attach at $1million in aggregated losses or higher, and is tailored to thepolicyholder's needs.

These policy enhancements and additional innovations—severalinsurance carriers will blend export credit risks with politicalrisks in a single policy—are enticing buyers back to the market.Insurance broker, Marsh reports that premium volume has risensteadily over the last few years, was up 7 percent in 2012, and iscurrently in excess of $9 billion worldwide.

Marketing must also take a bow for the increase. “Other than thechanges in the policy itself, insurers have made considerableinvestments in people on the street to promote the product,” saidJim Baumgartner, senior vice president in Marsh's trade creditpractice. “We also have people dedicated to companies with aglobal footprint needing coverage. There is definitely moreexcitement about export trade credit than there has been for sometime.”

Difference in a Decade A decade ago, there was excitement, too.At the time, another soft market prevailed, but buyers tended to beEuropean companies. US concerns were focused domestically on sales,and had little concern over the financial viability of customers.Currently U.S. companies are nearly as apt as their Europeancounterparts to consider the insurance, given their wider presenceoverseas.

Interestingly, for many companies, the cancellable product stillmakes sense. “The companies turning to the big three insurers areessentially smaller concerns that have limited credit riskexpertise in-house,” Ettien said. “Carriers like Atradia, Cofaceand Euler Hermes have dedicated information-gathering teams thatdig into the credit-worthiness of policyholders' customers.”

This information cuts both ways. It assists the carriers to haltlimits when it appears a debtor company is in financial straits,and it helps insureds understand which prospective customers mightbe less likely to pay, based on the carrier information.

“For really large customers with sophisticated creditdepartments and dozens of credit managers, the non-cancellableinsurance makes more sense,” Ettien said. “The deductibles are muchhigher (than cancellable policies), which keeps the insured's skinin the game and everyone honest. The carrier trusts that theinsured has the sophistication to know its customers' financialstability.” Not that the non-cancellable limits are exactly that.“Insurers can still cancel the limits, but with far more reasonablenotice—at least 30 days and in some cases 60 and even 90 days,”said Ettien. “There's wiggle room.”