Inflation directly increases financial risks for businesses by raising costs and reducing customers’ purchasing power. This leads to higher chances of payment defaults and business insolvencies. Trade credit insurance helps mitigate these risks by covering non-payments and stabilizing cash flow. Here’s what you need to know:
- Inflation Effects on Businesses: Rising costs for materials, labor, and utilities shrink profit margins, making payment defaults more likely.
- Increased Insolvency Rates: U.S. business bankruptcies rose by 23.5% in 2025, with insolvencies projected to grow further.
- Insurance Adjustments: Insurers are increasing premiums, tightening coverage limits, and modifying policy terms to address inflation-driven risks.
- Policy Types: Fixed limits offer cost predictability but may leave businesses underinsured during inflation. Adjustable limits scale with growth but come with fluctuating premiums.
- Risk Management: Businesses can reduce reliance on insurance by using credit reporting, factoring, or requesting advance payments.
Inflation makes trade credit insurance more critical than ever, offering protection against defaults while supporting business growth. Monitoring economic indicators like inflation rates, interest rates, and insolvency trends is key to staying ahead.
How Inflation Changes Trade Credit Risk
What Inflation Means for the U.S. Economy
Inflation is the ongoing rise in prices across the economy, often tracked using the Consumer Price Index (CPI). When inflation climbs, businesses face increased expenses for raw materials, labor, and utilities. This leaves companies with two options: absorb these higher costs or pass them on to customers through price hikes.
In the current economic climate, inflation has posed serious challenges for U.S. businesses. According to Allianz’s Global Insolvency Index, the U.S. saw a 22% rise in insolvencies in 2024. Projections for 2025 suggest North America will lead the global increase in business insolvencies, with U.S. cases expected to rise by 11% to reach 25,580. Compounding this, research indicates that a 1% drop in credit availability can drive insolvencies up by roughly 3% within just three months in the U.S..
These financial pressures create an environment where payment defaults become more likely.
Higher Costs Lead to More Customer Defaults
Inflation puts a strain on profit margins and overall financial health. As businesses grapple with rising costs, maintaining profitability becomes more difficult, increasing the likelihood of payment defaults.
A survey of 300 business owners revealed that 85% had been negatively affected by inflation over the past two years. Meanwhile, 94% of respondents reported keeping a close eye on inflation, with 64% predicting a downturn in profitability in the year ahead.
"Inflation increases financial exposures even when business volumes are not increasing. Rising costs of doing business can also increase the risk of counterparty default and bad debts." – WTW
Certain industries, like retail, hospitality, and manufacturing, are particularly vulnerable. These sectors often face shrinking margins due to rising costs, longer sales cycles, and reduced consumer spending power. For businesses locked into fixed-price contracts, surging material costs can quickly erode profitability, creating cash flow issues that may lead to payment defaults.
The effects don’t stop at individual businesses. Globally, rising insolvencies are expected to put 2.3 million jobs at risk in 2025 – 120,000 more than in 2024. On top of that, higher interest rates, introduced to combat inflation, add another layer of difficulty by making borrowing and refinancing more expensive and less accessible.
Allianz Trade — What’s Pressuring The Economy
How Inflation Changes Trade Credit Insurance Policies
Inflation is reshaping trade credit insurance policies, impacting businesses that depend on receivables protection. Rising operational costs and higher claim payouts are pushing insurers to rethink how they assess risk and price their policies. These changes go beyond just higher premiums, affecting the very structure of policies.
Premium increases across various insurance sectors are a clear reflection of inflation’s reach. For trade credit insurers, this means raising premiums and reevaluating coverage limits to keep up with the changing economic landscape.
"Inflation increases exposure bases, which increases premiums if rates remain constant. If rates soften, as is happening in some lines/classes, that means more exposure is being quoted at less rate, which is an obvious risk for overall insurance performance." – PwC
Trade credit insurers are particularly exposed to inflation’s effects. On one hand, they face rising operational costs for things like building materials and labor. On the other, they must prepare for higher claims as the value of insured receivables grows. This double impact forces insurers to adjust their pricing models more aggressively during inflationary periods.
Premium Increases and Coverage Limit Changes
To counter inflation, insurance companies are increasing premiums and rethinking coverage limits across their portfolios. The reduced purchasing power of money means insurers need to collect higher premiums to provide the same level of protection as before.
Premium adjustments are not uniform; they vary depending on industry risks. Sectors like retail, automotive, and metals are seeing steeper premium hikes due to an increased risk of payment defaults. Businesses in these industries are more vulnerable, and insurers are pricing in this heightened exposure.
At the same time, coverage capacity is tightening. Insurers might reduce credit limits, cancel coverage for certain buyers, or impose stricter terms on new policies. These measures can disrupt businesses that depend on receivables insurance to manage cash flow. With trade credit insurers covering approximately 10-15% of global trade – representing around $10 trillion in annual B2B transactions – even small reductions in coverage can have a widespread economic impact. When insurers pull back, businesses are left with tough choices: stop selling to certain buyers or take on the payment risk themselves.
Insurers are also adjusting other policy elements. Changes to indemnity levels and risk horizons are becoming common, refining how much insurers will pay out and under what conditions. While these adjustments help insurers and their clients manage risk, they require businesses to rethink their credit management strategies.
Fixed vs. Adjustable Coverage Limits
Inflation is also prompting insurers to reevaluate how they structure coverage limits. The choice between fixed and adjustable limits has become increasingly important, with each option offering distinct pros and cons during inflationary times.
| Coverage Type | Advantages During Inflation | Disadvantages During Inflation |
|---|---|---|
| Fixed Limits | Predictable premium costs; Shielded from mid-term rate increases; Easier to budget for | May become insufficient as receivables grow; Real protection value declines over time; Requires frequent policy reviews |
| Adjustable Limits | Scales with business growth; Maintains protection value; Reflects current market conditions | Premium costs can rise unexpectedly; More challenging to budget for; Limited by insurer capacity |
Fixed limits provide businesses with cost certainty, which is helpful for budgeting. However, as inflation increases the value of receivables, these fixed limits can leave businesses underinsured when they need protection the most.
Adjustable limits, on the other hand, offer flexibility by scaling with a company’s growth. They ensure that coverage keeps pace with inflation, but this flexibility comes with unpredictability. Premiums can rise mid-term, adding financial strain to businesses already grappling with higher costs.
The demand for adjustable coverage is growing, but insurers may not have the capacity to meet it. This can lead to competition for limited policies, driving costs even higher.
To navigate these challenges, businesses are working closely with their insurance partners. Sharing up-to-date financial statements and management information can help build trust and secure better terms. Transparency is key to maintaining coverage availability in a tightening market.
Some companies are also turning to alternative risk management strategies. These include requesting advance payments from customers, using credit reporting services, or leveraging non-recourse invoice discounting and factoring arrangements. By diversifying their approach to credit protection, businesses can reduce their reliance on traditional trade credit insurance while safeguarding themselves against payment defaults. These strategies are helping businesses adapt to inflation-driven risks while ensuring their receivables remain protected.
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How to Manage Inflation Risks with Trade Credit Insurance
Inflation presents challenges, but it can also open doors for businesses willing to adapt. Trade credit insurance isn’t just about safeguarding against risks – it’s about seizing opportunities. As Gary Lorimer, Head of Business Development for Aon Credit Solutions, aptly says: "It’s known as credit insurance, but it’s more opportunity protection".
Steps to Mitigate Risks Right Now
Taking a proactive approach can make a big difference in managing inflation-related risks. Start by conducting regular credit limit reviews – either quarterly or monthly – to keep pace with rising costs and shifting customer dynamics.
Use data-driven risk assessments to stay ahead of potential problems. By combining your internal payment history with external credit reports, you can spot early warning signs of customer distress. This insight allows you to tailor policy conditions, such as adjustable coverage limits or early warning systems, to better address inflation risks.
Another valuable tool is risk modeling for trade receivables. This helps forecast potential losses and evaluate the return on investment for trade credit insurance. With global company insolvencies expected to rise by 21%, this kind of analysis is essential for making informed decisions. Additionally, insured trade receivables can improve financing terms, as lenders often view them as lower-risk collateral.
Integrating automated invoicing and collections with your insurance can also help identify high-risk customers early in the process. These steps lay the groundwork for more specialized solutions to secure your receivables during inflationary periods.
How Accounts Receivable Insurance Supports Businesses During Inflation
Building on these strategies, Accounts Receivable Insurance (ARI) offers targeted solutions to protect against inflation-driven defaults.
ARI doesn’t just provide coverage – it delivers actionable insights. By leveraging a global network of carriers, it offers detailed risk assessments and payment trend data across industries and regions. This intelligence helps businesses identify sectors with higher default risks and adjust their customer strategies accordingly.
Another critical feature is claims management. When customers default due to inflationary pressures, having a reliable claims process ensures quicker resolutions, which is especially important when cash flow is tight.
ARI also supports businesses with domestic and international coverage options, making it easier to navigate the global ripple effects of inflation. For companies with overseas customers, tailored policy endorsements can address supply chain disruptions and other inflation-related challenges.
The real-world benefits of ARI are clear. Mike Libasci, President of International Fleet Sales, shares: "Accounts receivable insurance has allowed us to take on customers and transactions we wouldn’t have felt comfortable taking on by ourselves… It has not only allowed my company to take on larger deals, but be more liberal in terms, and the result has gone straight to our bottom line".
Flexibility in credit terms is another competitive edge. Ori Ben-Amotz, Chief Financial Officer of Hadco, explains: "With accounts receivable insurance, we don’t have to ask for cash up front or payment on delivery, which makes us much more competitive".
Additional features, such as pre-claim interventions, help prevent defaults before they occur, while policy renewal support ensures your coverage evolves with inflationary trends and changing customer behaviors.
Despite its extensive benefits, trade credit insurance is surprisingly cost-effective. Coverage typically costs less than 1% of sales revenues, even though accounts receivable may account for as much as 40% of a company’s assets. This makes it a smart and efficient way to safeguard your business against inflation-driven payment risks.
Using Economic Data to Make Credit Insurance Decisions
Smart businesses stay ahead by keeping a close eye on economic indicators. When inflation starts to threaten your receivables, knowing which metrics to track can mean the difference between being prepared and facing unexpected risks.
Reliable economic data is the backbone of effective trade credit insurance and risk management. By regularly monitoring key indicators, you can detect potential issues early and make adjustments to your insurance strategy. This approach helps you fine-tune coverage limits, manage premium costs, and set appropriate credit terms for your customers. Essentially, it provides the foundation for a thoughtful, data-driven credit insurance plan.
Given today’s economic climate, this kind of vigilance is more important than ever. For instance, U.S. business bankruptcies have risen significantly, and the prime rate is currently 7.5%, making borrowing more expensive for your customers. These aren’t just numbers – they’re clear signals that your credit insurance strategy may need to adapt to changing conditions.
Important Economic Indicators to Monitor
When managing trade credit insurance during inflationary times, there are three key indicators you should prioritize.
1. Inflation Rate
The inflation rate reflects how quickly prices are rising. Allianz predicts U.S. inflation will peak at 4.3% by summer 2025. This rise directly affects your customers’ operating costs and cash flow. When inflation climbs, profit margins shrink, making it harder for businesses to pay invoices on time. If you notice inflation trending upward, it’s a good time to reevaluate your coverage limits and consider tightening credit terms for customers who present greater risks.
2. Interest Rates
Interest rates determine borrowing costs across the economy. With the prime rate at 7.5%, businesses that rely on credit lines to manage their cash flow face higher financing expenses. This often leads to payment delays or defaults as companies struggle to manage increased costs. Keeping an eye on interest rates can help you predict which customers might encounter payment issues in the near future.
3. Business Failure Rates
Business failure rates give you a direct view of credit risk. Recent data paints a concerning picture: Allianz forecasts a 16% rise in U.S. insolvencies, and defaults or insolvencies account for 25% of corporate bankruptcies. These figures highlight the need for comprehensive coverage to safeguard against an increasingly risky environment.
Other metrics, like the Conference Board Leading Economic Index (LEI), provide additional insights. For example, the LEI experienced a slight decline in June 2025 and dropped 2.8% during the first half of the year. Justyna Zabinska-La Monica, a Senior Manager at The Conference Board, notes:
"The US LEI fell further in June… At this point, The Conference Board does not forecast a recession, although economic growth is expected to slow substantially in 2025 compared to 2024. Real GDP is projected to grow by 1.6% this year, with the impact of tariffs becoming more apparent in H2 as consumer spending slows due to higher prices."
While a recession isn’t currently expected, slower growth and mounting economic pressures make trade credit insurance an even more crucial tool.
Tariff levels also play a role. Today’s tariffs are at their highest levels since the Great Depression, adding cost burdens for businesses engaged in international trade. Companies that depend on imported goods or materials face increased expenses, which can strain their ability to pay suppliers and heighten credit risks.
To use these indicators effectively, it’s important to look at them collectively. For example, when inflation rises alongside higher interest rates and growing business failures, it signals a high-risk environment where expanding your trade credit insurance could be a smart move. On the other hand, when these indicators stabilize or improve, you might find opportunities to scale back coverage or adjust terms.
Establishing regular review cycles to analyze these metrics, along with customer payment trends, ensures that your coverage decisions remain aligned with current conditions. By integrating these insights, you can refine your credit insurance strategy to stay responsive in an ever-changing economic landscape.
Conclusion: Managing Inflation with Trade Credit Insurance
Inflation increases financial risks, with accounts receivable now making up nearly 40% of assets. This shift heightens vulnerability to defaults, especially as bankruptcies and insolvencies contribute to 25% of corporate failures. For businesses, this creates significant challenges in maintaining steady cash flow.
The best way to tackle these challenges is to act early and decisively. As Gary Lorimer, Head of Business Development for Aon Credit Solutions, puts it:
"Having trade receivables backed by insurance as an asset will become even more important as time goes on. It’s known as credit insurance, but it’s more opportunity protection."
This perspective highlights a shift in how businesses can use trade credit insurance – not just as a safety net but as a tool for growth. By protecting against potential losses, trade credit insurance allows companies to confidently expand credit limits for existing clients and offer credit to new ones. It acts as both a shield and a springboard, offering protection while enabling businesses to seize opportunities even during uncertain times. Features like early warning systems help identify potential payment issues, while real-time customer insights support smarter, more informed credit decisions.
Accounts Receivable Insurance (ARI) provides a tailored approach to navigating inflationary pressures. It combines customized policies, thorough risk evaluations, and dedicated claims support to protect cash flow while giving businesses the flexibility to pursue growth. With access to a global network of credit insurance carriers, ARI offers coverage designed for both domestic and international markets, ensuring businesses stay aligned with current economic trends.
Economic data makes one thing clear: waiting to act increases costs and reduces options. Regularly reviewing policies and making decisions based on up-to-date data is essential for maximizing the benefits of trade credit insurance. In today’s economic climate, this type of insurance doesn’t just safeguard businesses – it serves as a foundation for growth, even in the face of uncertainty.
FAQs
How should businesses choose between fixed and adjustable trade credit insurance limits during high inflation?
During times of high inflation, businesses face unique challenges in managing financial risks. One important decision is choosing between fixed and adjustable trade credit insurance limits. Each option offers distinct advantages depending on your business needs and the economic landscape.
Fixed limits provide a sense of stability and predictability, which can be especially helpful when inflation causes uncertainty around customer creditworthiness. With this approach, coverage remains steady, reducing the need for frequent adjustments and offering a clear financial picture.
Alternatively, adjustable limits bring a level of flexibility that can be invaluable in volatile markets. This option allows businesses to adapt coverage as economic conditions shift, ensuring better alignment with changes in customer financial health and market dynamics.
Deciding between these options requires a careful look at your company’s financial position, the credit profiles of your customers, and the broader economic environment. Balancing these factors will help you determine the most suitable path forward.
What are other ways businesses can manage credit risk besides using trade credit insurance?
Businesses have various strategies to handle credit risk beyond just trade credit insurance. For instance, they can require collateral or personal guarantees to secure debts, ensuring there’s a safety net if a customer fails to pay. Another approach is risk-based pricing, where terms are adjusted based on the customer’s creditworthiness. Expanding the customer base is also a smart move, as it reduces dependency on just a few major accounts.
Staying on top of credit monitoring is equally important. By keeping a close eye on customers’ financial health, businesses can spot potential issues before they escalate. Financial tools like factoring – selling receivables for immediate cash – or securitization – pooling debts and selling them as securities – can also help transfer risk. Lastly, negotiating stricter payment terms can improve cash flow, giving businesses more control over their finances. These proactive measures can go a long way in managing credit risk and protecting the company’s financial stability.
How can tracking inflation and interest rates help businesses improve their trade credit insurance strategies?
Tracking economic indicators like inflation and interest rates is crucial for businesses to make informed decisions about their trade credit insurance. When inflation rises, the cost of goods goes up, which can put pressure on customers’ ability to pay their invoices on time. On the other hand, higher interest rates often result in tighter credit conditions, increasing the likelihood of payment defaults. Keeping an eye on these trends allows businesses to adjust their insurance coverage to better navigate these challenges.
By understanding these shifts, companies can evaluate their risk exposure more effectively and make smarter choices about extending credit to customers. Taking proactive steps in response to economic changes helps build financial stability and ensures that a business’s trade credit insurance strategy stays in tune with the market landscape.
