Strike a blow for trade credit insurance

Due to the Covid-19 crisis, private credit insurers expected a drastic increase in corporate insolvencies and thus high losses. Therefore, they had to tighten their underwriting policy considerably. The credit insurers reacted to the changing risk environment by downgrading and reducing cover in many countries, sectors and industries.

Hence, the EU Commission assumed that the capacities of private credit insurers would very soon no longer be sufficient for exports for all countries, but that at the same time the demand for credit insurance was likely to increase considerably due to the crisis.

State schemes for exports

The aim of state schemes (like in Germany, Belgium, UK, Netherlands, Slovenia, Norway, Italy…) was to ensure that the private credit insurers continue to maintain their granted credit limits in order to enable exporters to conduct new export business despite the crisis. These schemes gave early comfort to credit insurers to maintain the granted credit limits on commercial buyers. However, they showed little effect only.

At the end of June 2021 these schemes will expire. Why? Many governments have passed huge economic stimulus programmes to fight against the economic crisis caused by Covid-19. As a result, predicted claims from insolvencies and non-payments were much lower than normal in many countries.

According to ICISA (the International Credit Insurance & Surety Association) it is noted that on a global level, claims were up in comparison to last year reflecting that state aid was different according to the financial possibilities and capabilities of countries. It was stated by ICISA that premium and exposure remained at high levels despite some reductions, also mirroring the economic impact of government interventions in support of the real economy.

  • Despite the challenging economic environment and uncertainties, insurance coverage for trade reaches new peaks in 2020. A few figures (Source: press article “The-ICISA-Insider_June-2021”):
  • Insured exposure was 2.4 trillion EUR in 2020 despite the COVID-19 pandemic, thereby supporting world trade.
  • Premium written was 6.3 billion EUR in 2020 compared to 6.9 billion EUR in 2019 at constant FX rates, showing the effects of COVID-19 early in 2020.
  • Claims paid increased by 12% to 3.8 billion EUR.

Some companies are now specifically questioning their trade credit insurance. In terms of the risk of non-payment and working capital, the payment method “open payment terms” is not the safest payment method.

On the one hand importance of the trade credit as a sales promotion instrument has become an integral part of business life. On the other hand, the risk is quite high. The risk for the supplier consists in the fact that the customer will be late, only partially or not at all fulfilling his payment obligations. The supplier bears all risks and the financing costs for the supplier credit granted.

Prepayment as an alternative?

Let´s have a look at two different payment methods in trade. Prepayment” may be the best alternative in relation to the risk of non-payment as well on working capital because the payment takes place before delivery / service provided that the prepayment is accepted by the customer. But in international trade it could be a major competitive disadvantage for the supplier.

Letters of Credit as an alternative?

Letters of credit are most often used in international trade when the buyer is unknown to the exporter or in politically more risky countries. On the one hand, letters of credit offer exporters security of payment. In practice, there are several varieties of letters of credit. It is very important for exporters to be aware of exactly what kind of letter the buyer has obtained. On the other hand, letters of credit have disadvantages as well. Letters of credit involve a large amount of minutest details, and payment will only be made if the terms of the letter are met accurately. Costs for the buyer should not be disregarded either as these could make the exporter uncompetitive compared to other exporters who sell their goods on open payment terms.

You can say that effort, complexity, practicality and price are not really an alternative to a trade credit insurance solution.

Trade credit insurance is the first choice

Many of our clients use a credit insurance as a tool to manage the risks of their business. This has been the case for many years and will likely remain the mean of first choice to protect business transactions on open payment terms with an appropriate credit insurance solution. It is not just the indemnification in the event of a claim, but rather the professional monitoring of the market participants` creditworthiness in a manner that cannot even come close to being checked internally. This claim is realised in the best possible way through the risk transfer in the form of credit insurance. Credit Insurance as an early warning indicator helps to prevent payment defaults from occurring in the first place, which in turn is much better than suffering from losses.

Nonetheless, the credit insurance sector is called to action. Rebounded economic developments must be supported by the credit insurance industry with sufficient revolving cover for goods being delivered or services rendered. The credit insurance industry should support suppliers to take advantage of opportunities and at the same time quickly identify, minimise and cover risks.

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Lisbeth Lorenz

Group Practice Leader Credit & Political Risk

T +43 5 04 04 280