Credit insurance, a once-arcane risk management tool, isbecoming increasingly popular in the United States. Why? The answeris simple. Defaults and bankruptcies are at an all-time high.

Accounts receivable typically represent a company's largestsingle asset. Just one large customer defaulting on a payment couldspell disaster–a lesson too many companies have already learned thehard way.

According to the AmericanBankruptcy Institute, business bankruptcy filings reached 30,033 inthe first half of 2009 alone. That's a 64 percent increase over thesame period in 2008.

In fact, a recent survey of chief executives found that paymentdefault–not the cost of capital or poor sales–represents thegreatest risk to their balance sheets.

Commercial trade credit insurance is a way for companies toprotect themselves. It can be purchased to cover a singletransaction, transactions with certain customers, certainindustries, or all of a company's transactions with all of itscustomers. At its most basic, credit insurance provides two kindsof protection.

o It can cover counter-party insolvency. (If a customer goesbankrupt, your outstanding accounts receivable will be paid.)

o Or, it can cover bad debts. (If a customer defaults on apayment, the outstanding accounts receivable will be paid.)

The global market for credit insurance is $6.7 billion. Of that,about $4 billion is written in Europe. U.S. premium written is onlyabout $800 million. However, that is changing.

Credit insurance is very common in Europe. An estimated 40percent of companies–large medium and small–use credit insurance.There are two reasons:

o Much trade takes place between countries in Europe. If acustomer defaults in another country, navigating the local courtsystem is difficult, expensive and time-consuming.

o Terms in Europe tend to be more liberal, with 90 days and 120days not uncommon. This longer duration represents a greaterrisk.

Though credit insurance was invented in the United States backin the 1890s, less than 10 percent of American companies use ittoday. The reasons are the converse of the European experience.Most U.S. companies sell to domestic customers and terms in theUnited States tend to be shorter.

As the U.S. economy drags itself out of the recession, however,American companies need to protect their assets more than ever. Asa result, all of the major credit insurers report that inquiriesare significantly up. More and more American companies are findingcredit insurance to be an effective risk management and operationaltool.

In addition to protecting against counterparty risk, creditinsurance provides powerful advantages beyond the core benefit ofprotecting against bankruptcy or payment default.

Perhaps the most important benefit is the fact that creditinsurance improves a company's financial profile. Lenders are morelikely to extend credit to companies whose accounts receivables areinsured. And when credit is extended, interest rates tend to belower.

Credit insurance also gives companies a competitive advantage,enabling them to offer potential new customers extended or moreopen terms, while sharing that risk with a third party.

It can also help businesses find the right customers and/ormarkets. Credit insurers maintain payment and credit information onmillions of companies worldwide.

This coverage can lower the cost of collections. In fact, manyEuropean companies use credit insurance as a way to outsource theircredit departments.

And finally, credit insurers can provide valuable informationabout expansion into emerging markets and industrial sectors, whileoffering protection against political turmoil, import disruptionsor trade restrictions.

Because of its direct effect on balance sheets, purchase ofcredit insurance used to be the exclusive domain of chief financialofficers. But lately, as counterparty risks become more systemic,risk managers are also playing a larger role in its purchase. Thecoverage is sold either directly or through brokers.

As with any type of insurance, premiums are based on risk. Whenit comes to credit insurance, there are a large number offactors–size of the debt, duration, industry, location. But themost important factor is the credit history of the customer.

Credit insurers have come under criticism during the currenteconomic crisis. Premiums have increased sharply and coverage hasbeen reduced. Most criticism, however, has come not from customers,but from customers' customers–that is, their debtors, who have seentheir terms shortened or withdrawn.

The primary role of the underwriter is to measure and pricerisk. Bankruptcies and defaults are at an all-time high. That isnot the fault of insurers. If anything, credit insurers, by payingtheir claims, have played an important role by slowing and/orpreventing bankruptcy chain reactions.

Moreover, several of the larger credit insurers havetransparency policies that enable creditors to review the criteriaused to assess their risks. Challenges on the merits are veryrare.

While use of credit insurance in the United States may neverapproach European levels, writers do expect continued growth–evenafter the credit crunch–for several reasons:

o First, many businesses that have been using credit insurancehave come to appreciate the many extra benefits.

In their experience, the very reasonable premium–which can bepassed along to customers–is a small price to pay for the extrasecurity, stronger balance sheet and accounts receivableoptimization.

o Second, as the global economy becomes more “value based,”American companies will be forced to develop new markets, bothdomestically and overseas.

These new markets carry inherently greater risk, while newcustomers will demand more liberal terms.

But it is the economic recovery itself that poses the mostimminent risk. Savvy businesses know that the recovery period aftera recession is the most dangerous. Many customers who have surviveduntil now will default as they use scarce capital to rehireworkers, buy materials and supplies.

Good times or bad, commercial trade credit insurance will bethere to protect balance sheets and smooth volatility.

Kerstin Braun, Ph.D., is executive vicepresident of Coface North America Insurance Company in New YorkCity.