Along with death and taxes, companies can count on the risk ofbusiness interruption to their operations at some time.

The supply chain may be affected by a major snowstorm anywherein the United States or a typhoon in Indonesia. A cyber attack on athird-party vendor can take down a company’s website or result in ahack. One outgrowth of managing these risks has been the expansionof Business Interruption insurance that covers many business incomelosses.

Another solution that companies can use to manage risk is tradecredit insurance, a Business Insurance product that protects aseller against losses from nonpayment of a commercial trade debt,which is especially valuable to the energy industry, says Jay Rose,managing director of Euler Hermes Energy.

North America is the fastest growing market for trade creditinsurance in the world, he explains, and within North America, thelargest industry is energy, which itself is vast anddiversified.

“Within the energy sector the ability to get and give credit ismore critical than in many other industries because of theextremely thin margins, and high risk/reward,” Rose says. EulerHermes recently hired a team of energy professionals to betterunderstand the way the energy market works, especially transactionsin energy products. This helped Euler Hermes Energy tailor tradecredit insurance to meet the specific needs of the energymarket.

Related: Here’s how Business Interruption insurance isevolving

“The Euler Hermes trade credit insurance programs are designedto be another financial tool in an energy company’s credit toolboxto help them mitigate risk and grow their sales,” explains Rose.“This insurance is more of a financial product until there is adefault that gives rise to a claim. Then, it has the same valueproposition that any other insurance line brings to a business. Ittakes a significant risk to the balance sheet and transfers it to athird-party.”

Increased liquidity

Trade credit insurance works in conjunction with a company’scredit and commercial teams. Explains Rose: “Executives are stilltasked to grow in a volatile market with falling and low commodityprices, collapsing balance sheets, tight margin spreads and nervousstakeholders. Trade credit insurance provides increased liquidityfor energy companies, and the cost of the insurance is low inrelation to the margin that’s given by creating moreopportunity.”

The economic environment and the energy sector are both changingdramatically, Rose observes. “The energy space has become globalvery quickly, a change from very domestic in the United States. LNG[liquefied natural gas] companies are selling LNG all over theworld starting in 2015, putting more product at risk of supplychain disruption. There is more foreign investment in U.S. energycompanies, Mexico has deregulated its energy industry, and newdestinations are emerging.”

Trade credit insurance also has evolved, and policies aredesigned to align with the way the business operates in the 21stcentury. For example, trade credit insurance for the energy sectornow adds spread risk loss coverage, Rose notes, which coversmark-to-market exposure. “If a company is selling product on afixed price contract, and there is a credit default, they may haveto liquidate that contract on the open market. If the price of thecommodity has dropped significantly, the company has amarked-to-market loss,” he explains. “We now cover that spread,which is critical to the company’s internal value at risk. When youhave value at risk that constrains an organization’s internalliquidity, it prohibits trade.”

Related: Top 8 emerging risks for today’s supplychains

Increasing awareness

Most agents are constrained in their ability to provideprofitable solutions to assist companies in growing their revenue,Rose adds. Agents can become trusted business partners to theirclients by helping them understand the risks they face from theiroperations, and trade credit insurance is one more solution thatcan be used to maintain stability within the client’s business.

Agents and brokers have to start with a deep understanding ofthe needs of the clients’ business and understand the solutionsthat the carriers can provide. Rose advises agents and brokers tohave a discussion with their clients to see whether trade creditinsurance is a product they’re aware of. “Then, it’s easy foragents and brokers to figure out when and where trade creditinsurance could be a critical benefit to the clients,” he says,“regardless of where they are on the supply chain.”

Companies involved in moving commodity, producing commodity, andtransporting commodity are good candidates for trade creditinsurance, Rose says. Currently, he is working with majorintegrated producers, marketers, commodity traders, pipelines withhuge capital requirements and collateral constraints, refiners, andshippers that want to put product on the water and in othercountries—the full spectrum of the sector. His clients have foundthat there are multiple benefits for each company, for example,enhancement and leverage to working capital, overall riskmitigation, support and increased stability or safer growth.

Outlook for 2016

When asked about the outlook for the energy sector in 2016, Rosesays, “The continued decline in energy prices has built morereliance on solid counterparty credit controls. Value paritybetween global regions and North American export capability havechanged the market dynamic. This has created a larger, moreintegrated market for Euler Hermes Energy as companies are forcedto expand their horizon without adding risk.”

Trade credit insurance is used far less in the United Statesthan in emerging markets, especially Europe and Asia, Rose notes.He believes that globalization, the volatility of the energyindustry and the aspiration for growth compound the need for agentsand brokers to make clients aware of additional financial solutionsthat can help them leverage working capital, mitigate risk to theirbusiness and secure their largest and only uninsured asset on theirbalance sheet.

Related: 4 ways to increase risk protection and savings forindustrial companies

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