Captives and Trade Credit Risk - Unlocking Protection and Liquidity

Executive Summary

Global supply chains and credit markets have grown increasingly fragile. Rising insolvencies, geopolitical uncertainty, and tightening credit insurance capacity are creating unprecedented challenges for businesses that extend trade credit. Traditional trade credit insurance is often expensive, restrictive, or unavailable leaving companies exposed to buyer default and cash flow disruption.

Captive insurance programs offer a powerful alternative. By retaining trade credit risk in a captive, companies gain greater flexibility, access to reinsurance markets, and the ability to stabilise working capital. This post explores how organisations can use captives to:

• Secure capacity when the commercial market withdraws

• Protect balance sheets from buyer default and political risk

• Enhance liquidity and borrowing base availability

• Lower long-term total cost of risk (TCOR) while capturing underwriting profits

  
  

The Trade Credit Risk Challenge

Rising Insolvencies: Global corporate insolvencies are forecasted to increase in 2025 amid high interest rates and slowing growth.

Coverage Gaps: Traditional insurers impose restrictive limits, exclusions, or sudden cancellations, especially for higher risk counterparties.

Working Capital Strain: Uninsured receivables reduce borrowing base availability, constraining liquidity.

Market Volatility: Cyclical hard markets push premiums higher and reduce available capacity.

Why Captives Are a Strategic Fit for Trade Credit

Access to Capacity and Flexibility

• Captives can issue tailored trade credit policies when commercial insurers pull back.

• Coverage can be designed for strategic customers, industries, or geographies that traditional insurers avoid.

• Captives can supplement commercial programs (e.g., “top-up” capacity above insurer limits).

Balance Sheet Protection

• Insuring receivables within a captive mitigates losses from buyer default, insolvency, or political risk events.

• Diversified portfolios of receivables create predictable loss patterns suitable for captive financing.

Working Capital and Financing Benefits

• Banks may recognise captive-issued trade credit policies (backed by reinsurance) as eligible collateral.

• Improves borrowing base calculations, unlocking liquidity for growth or acquisitions.

Cost Efficiency and Value Creation

• Premiums otherwise paid to external carriers remain within the corporate group.

• Favourable claims experience builds surplus and generates underwriting profit.

• Long-term, captives can smooth volatility across business cycles.

  
  

Practical Applications of Captive Trade Credit Programs

Standalone Captive Trade Credit Program - Insure receivables of a parent company or group directly.

Top-Up / Excess Capacity Coverage - Captive provides coverage above commercial insurer limits, protecting high-value accounts.

Gap-Filling - Captive covers risks excluded by insurers (e.g., specific geographies, distressed buyers).

Reinsurance Participation - Captive assumes a quota-share of trade credit policies, aligning corporate interests with market insurers.

Case Example: Captive Trade Credit in Action

Scenario: A multinational manufacturer with $2B in annual sales faces declining trade credit insurance limits from commercial carriers, leaving $200M of receivables uninsured.

Captive Solution: The company establishes a captive to retain the first $50M of credit risk and purchases reinsurance for catastrophic layers.

Impact:

• $4M annual savings compared to commercial-only coverage

• $2.5M in underwriting profits captured in year one

• Additional $75M in receivables recognised by lending banks as eligible collateral, enhancing liquidity.

  
  

Strategic Benefits for Corporates

• Resilience: Ensures continued coverage during hard market cycles.

• Liquidity: Improves cash flow and access to financing.

• Governance: Centralises trade credit risk management across markets.

• Value Creation: Enhances EBITDA stability and reduces volatility in reported results.

How Capvartis and CaptiveIQ Help

Capvartis’ CaptiveIQ platform simplifies the adoption of trade credit captives by automating feasibility studies, program design, and ongoing management.

• Feasibility Analysis: Rapid modelling of receivables portfolios, default probabilities, and TCOR scenarios.

• Custom Program Design: Aligning captive structures with financing and treasury strategies.

• Financial Projections: Data-driven stress testing of default and recovery scenarios.

• Ongoing Oversight: Simplified governance, compliance, and reporting.

  
  

CaptiveIQ transforms complex trade credit strategies into actionable, transparent solutions helping companies safeguard liquidity and strengthen financial resilience.

Conclusion

Trade credit risk is one of the most critical and volatile exposures faced by global businesses. Captive insurance provides a flexible, cost-effective, and strategic tool to manage these risks protecting balance sheets, enhancing liquidity, and capturing value that would otherwise be lost to commercial insurers.

With Capvartis and CaptiveIQ, organisations can harness the power of captives to turn trade credit risk into an engine for resilience and growth.

To learn more or schedule a captive cyber risk consultation, contact us at info@capvartis.com or visit www.capvartis.com.