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  • Selena Thian

Trade Credit Insurance Claims Expected to Spike due to COVID-19

Trade credit insurers to experience surge in losses due to bad claims ratios.

The recent pandemic has impacted many businesses and sectors over the globe. While some organisations are currently facing instabilities and losses, many have yet to see an impact as a direct result of COVID-19.

However, it is believed from a research on Berne Union that the trade credit insurance industry will experience a harsher stretch as they enter the second half of 2020.

The International Union of Credit & Investment Insurers, otherwise known as Berne Union, is a distinguished global not-for-profit trade association, specifically dealing with the export credit and investment insurance industry. The members consist of private credit and political risk insurers, government-backed export credit agencies as well as multilateral institutions which are providing insurance products.

A look into Berne Union's preliminary report on the business activity for the first half of 2020 revealed that the expected surge in trade credit insurance claims following the pandemic has not been realised yet. In the report, Berne Union noted that they experienced a drop in export credit claims paid by an overall 16% in the first half of 2020 as compared to 2019.

What is Trade Credit Insurance?

Manufacturers with significant buyers can choose to insure only on key accounts they deem necessary.

The primary role of trade credit insurance is to safeguard sellers against buyers that are unable to or do not pay. These situations include companies who have declared bankruptcy, insolvency or a similar legal status, as well as clients who have delayed their payments to insured.

However, as these policies are usually flexible with their terms, it all depends on the agreed terms between the insurer and policyholder. Some organisations may decide to cover their entire portfolio of buyers while some would opt to cover only the key accounts. The payable outstanding also varies for different insurers and policies.

“If a buyer does not pay, the trade credit insurance policy will pay out a percentage of the outstanding debt. This percentage usually ranges from 75% to 95% of the invoice amount, but may be higher or lower depending on the type of cover that was purchased," explained the International Credit Insurance & Surety Association.

What Happens Next?

Many are concerned of the uncertainty that this pandemic will bring to the trade credit industry.

In regards to the claims data, Berne Union president, Beatriz Reguero, commented, “The fact that we have not yet seen a significant increase in claims payments is in large part due to protection afforded by various forms of fiscal support from governments as well as by the quick reaction of lenders and insurers in restructuring deals when necessary.”

Berne Union secretary general, Vinco David, stated that while an increase in claims resulting from the pandemic is certain, where these claims may materialise are unpredictable as it depends greatly on 'both the underlying business and the management of current structural support.'

“The transition away from state support, both for exporters and the private market, requires very careful management and creative and flexible approaches from all players to avoid disruption. This is something we will be looking at through the remainder of this year as many of the support schemes approach their provisional end dates.”



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