Trade Credit Insurance



Abstract

Trade credit management represents an important strategic opportunity for firms to enhance performance, liquidity and profitability. This paper analyses the case studies of two companies, Threshers plc and DSGi. The size, macroeconomic significance, absence of regulation and presence of significant internal risk associated with trade credit suggest that such an enhanced meta-level understanding of this substantial financial market that shadows regular business-to-business operations is imperative. The paper synthesises what is known about the basic parameters of trade credit operations, suppliers' motivations and imperatives for granting credit to trade customers and the factors that determine credit periods and terms.

Acknowledgement

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

Table of Contents

ABSTRACT2

ACKNOWLEDGEMENT3

CHAPTER 16

INTRODUCTION6

Purpose of the Study6

Background of the Problem / Overview of the Study7

Significance of the Study12

Euler Hermes, Atradius, and Coface15

CHAPTER 218

LITERATURE REVIEW18

UK Market and trade credit insurance26

Optimal Structure of Company27

Bankruptcy distress33

CHAPTER 337

METHODOLOGY37

Research Method37

Qualitative secondary Research37

Case Study37

DSGi39

Threshers plc45

CHAPTER 453

Impact of Credit Crisis on various Industries responses of Governments53

Construction53

Small & Medium Enterprises54

Energy Industry55

Agriculture Sector56

ALTERNATIVES TO CREDIT INSURANCE59

Debt Factoring61

Alternative Risk Transfer61

Deductibles or Self-Insured Retentions62

Collateral63

Finite Risk Transfer63

Letter of Credit63

Standard form contracts64

Insolvency65

Price variation and/or price fixing66

Set-off67

CHAPTER 668

CONCLUSION AND SUGGESTIONS68

Credit Insurer's Response69

REFERENCES73

Chapter 1

Introduction

Purpose of the Study

The end of the nineteenth century, saw the development of credit insurance, mostly in Western Europe between the first and Second World Wars several credit insurance companies were founded in every country, some of them even managing the political risk to export on behalf of their State. Over the 90s, a concentration of the trade credit insurance market took place and three groups accounted for over 85% of the global credit insurance market(Brunner Krahnen 2002). The main players focused on Western Europe, but eventually and rapidly expanded towards Eastern Europe, Asia and the Americas. The main players were, Atradius, a merger between NCM and Gerling Kreditversicherung, later renamed Atradius after it was de-merged from the Gerling insurance group. Euler Hermes, a merger between the two credit insurance companies of the Alliaz Group. CESCE, formerly a Spanish government sponsored institution established in 1966, now part of the CESCE GROUP, and COFACE, formerly a French government sponsored institution established in 1946. (Cruickshank 2000)

Compagnie Française d'Assurance pour le Commerce Extérieur (COFACE), after being founded in 1946, was subsequently privatised by the government and continued as a commercial enterprise. Today, however, COFACE is owned by the band group Natixis. The insurance company provides guarantees or insurance on accounts receivable coming out of sales of commercial goods and services on credit terms of 30 day and 60 day time scales especially for export companies, and sometimes on longer time scales.   

Background of the Problem / Overview of the Study

Inevitably the specialised insurance market that covers trade finance has been hit by the crisis. Brokers and insurers have been talking a hard market for over a year  but it is only now that the market is really beginning to experience the full-scale of the predicted claims. Underwriters each tend to divide the products ...