How Credit Insurance Enhances Global Trade and the Clean Energy Transition
Credit insurance is critical in supporting global trade. According to the International Credit Insurance and Surety Association, Trade Credit Insurance supported 12.07 billion Euros in total trade volume in 2020. Overall, 15-20% of global trade relies on credit insurance to stimulate economies and create a liberal, stable market for goods, services, labor, and capital. As economies and nation-states invest in clean energy markets, credit insurance can continue providing a stable marketplace by mitigating risks for stakeholders.
How did we get here?
The first records of credit insurance date back to the 1860s, when Johns Hopkins endorsed promissory notes from individuals and firms that he judged to be worthy of credit risks. Hopkins promised to fulfill the obligations under the note in the event of default, and made it easier for the note bearer "to sell it to another firm or to a bank." Hopkins's method of endorsing promissory notes, as cited in Arthur Farquhar and Samuel Crowther's book The First Million the Hardest: an Autobiography, also includes historical anecdotes considered to be the entomology of financial derivatives.
Over 100 years after Johns Hopkins began the tradition of factoring, European nation-state borders began solidifying after WWII, and merchants selling goods throughout the continent needed methods to protect themselves against risks. The risks at the time included nationalizing assets (this promoted economic recovery after the war but restricted the scalability of private enterprise) and sovereign and foreign corporate defaults. Merchants were worried about sending goods across newly constructed state borders to buyers with unknown financial histories.
Legal methods to enforce payment "may be either unavailable or too expensive to pursue." To solve this, the Marshall Plan included the creation of the U.S. Export-Import Bank (Eximbank), where the U.S. government worked with corporations to help foreign buyers receive direct financing and have their own streams of revenue insured. After WWII, private-sector groups, like the American International Group (AIG), Zurich Insurance Group (Zurich), and Ace Limited (now Chubb), emerged to provide assurance to offset risks - sellers could pay a premium to transfer payment and recovery risks to other entities.
Despite advancements in factoring, there is a considerable gap between what lenders are prepared to provide and what borrowers need. The total gap in funding is estimated to be between $2 trillion and $30 trillion USD. This gap in financial resources represents a loss of untapped opportunity for the global economy as these funds are illiquid.
Resources to support small and medium-sized enterprises (SMEs) exist but are withheld due to traditional lenders' perceived risk. Specifically, compared to large enterprises, only 10% of SMEs have access to financial resources, while 90% of small and medium firms are disproportionately denied access to funding. SMEs face challenges from traditional lenders because there is a perceived high risk in lending to these firms. Traditional lenders rely on conventional risk assessment methods, which consider factors including historical financial records. Just as in previous iterations of global trade, credit insurance provides an avenue toward unlocking and adding funds into the market that otherwise would not have been available.
The Role of Credit Insurance
Credit insurance has been critical for expanding global trade, particularly for SMEs with low credit scores, simply because they are relatively new to the market. A similar challenge is emerging for SMEs as the United States transitions to clean energy. SME are viewed as inherently risky.
Low credit scores and other risk factors are barriers to acquiring clean energy. Specifically, SMEs struggle to secure capital from traditional financial lenders to update or install infrastructure. Riskiness here refers to factors such as location and financial history. Just as in the case of global trade, credit insurance can help with the clean energy transition as it provides factoring services to traditional lenders for borrowers new to the market. Credit insurance assumes the risk and guarantees that the lender will be fully compensated.
The global economy misses out when capital is withheld from the market based on risk. As the United States and countries worldwide transition to clean energy, providing that financial backstop is critical for unlocking otherwise illiquid capital. When SMEs are denied funding, entire markets lose out on immediate cash flows that can be dedicated to innovative technology and scalable solutions for countries, states, and communities. Where traditional lenders gatekeep resources, credit insurance unlocks the value SMEs can immediately put towards installing or retrofitting renewable technology for everybody. When working alongside government incentives, such as tax breaks and grants, and private capital from traditional financiers, credit insurance is critical to transitioning the world to a more sustainable future.