How has trade credit insurance market been impacted by COVID-19?

"No-one anticipated what would happen" when the coronavirus was first detected

How has trade credit insurance market been impacted by COVID-19?

Insurance News

By Bethan Moorcraft

On December 31, 2019, the World Health Organization (WHO) was informed of cases of pneumonia of unknown cause in Wuhan City, China. A week later, Chinese authorities officially identified a novel coronavirus, which would quickly become the global COVID-19 pandemic.

“In January 2020, there were stories of this flu-like illness in China. At the time, of course, no-one anticipated what would happen,” said James Musters, managing director of excess of loss (XoL) at Euler Hermes, a global trade credit insurer. “Then in March, suddenly we were all sent home, the kids were sent home from school, and at the time, [people projected it would take] two weeks to flatten the curve.”

When the severity of the situation became clear by March 2020, businesses worldwide pivoted quickly from in-office to remote working, schools transitioned to remote-learning, countries imposed lockdowns, travel bans and border closures, and the global economy experienced a massive shockwave. This disruption had a big impact on the global trade credit insurance market - but luckily, the market was well prepared.

Musters explained: “Back in 2019, we were already preparing for a downturn. I’m certainly not saying we predicted COVID-19 – that would be ridiculous – but we did predict an economic slowdown. We were already taking measures in 2019 to make sure that our information and our analysis was as up to date as it possibly could be on the risks that we covered, to get ourselves and our customers into the best position to go into the next downturn - which we expected to happen in late 2019, early 2020.”

When COVID struck, the world very quickly saw dramatic and sudden effects across the global economy of all the lockdowns, shutdowns and border closures.

“What was interesting about that economic crisis was that it was caused by supply issues,” Musters commented. “Usually, these kinds of recessions and slowdowns are caused by problem of demand. People lose their jobs, they stop spending money, and because they’re not spending, the demand drops, and the economy goes into a recession. It’s very rare for it to be caused by supply issues. I’m not talking about the supply chain issues, which are a topic now, but just issues of supply from January, February, March 2020, when suddenly all the factories in China shut down, and that supply shortage shook up the economies everywhere, together with travel bans and travel problems. This had a knock-on effect throughout the global economy.”

Trade credit insurance protects manufacturers, traders and service providers against losses from non-payment of a commercial trade debt. If a buyer does not pay (often due to bankruptcy or insolvency) or pays very late, the trade credit insurance policy will pay out a percentage of the outstanding debt. Trade credit insurance can prevent bankruptcies, help companies manage credit, and even present opportunities for business expansion.

“All of these companies – in particular, restaurants, bars, travel companies, and retail stores – were suddenly unable to open, unable to pay their staff, and unable to pay their suppliers. So, we had a huge increase in the volume of trade credit insurance claims at Euler Hermes throughout April, May and June of 2020,” said Musters. “We had a huge increase in the volume, to the extent we had to draft people into our claims team from other parts of the company. As an insurance company, we pride ourselves on the services and support we provide our customers in good times, but ultimately, [being an insurance company] is about paying claims – and we paid a lot of claims very quickly.”

However, the doom and gloom didn’t last too long, according to Musters. Towards the middle of 2020, the positive impact of government support schemes started to be realised across industries. Temporary mitigation policies such as emergency funding, tax relief, and government-backed insurance capacity, were implemented to keep companies and economies afloat. By and large, those policies were successful, and the global economy reached more stability, bringing trade credit insurance claims back to more normal levels through 2021.

On the excess of loss (XoL) side, where Musters leads Euler Hermes’ Americas region, the impact of the pandemic was less severe. XoL is a non-cancellable form of credit insurance, which provides flexible and innovative solutions to insulate companies from extraordinary and disruptive loss events. It typically caters to larger companies with experienced credit management teams, who assume and manage most of their trade credit risk in-house, but require protection against unforeseen loss events.

“Our XoL customers didn’t see much impact in terms of actions or monitoring from us during COVID because really, we’re trusting them to manage their own credit risk,” Musters told Insurance Business. “We’re very selective about who we offer our XoL product to – it’s only the strongest, most well-established companies in their sectors. And these are companies who want to avoid losses every bit as much as we do – more so in fact, because they’re taking the first share of the losses themselves, so they’re monitoring the risks very closely.

“The XoL market during COVID, for Euler Hermes and the other carriers, the claims were much lower than in regular trade credit insurance. I think that’s because we’re all very selective around the kind of company we’re willing to insure. We sell the product to companies who we trust to manage the risk themselves, and they did. So I think it very much proves the XoL model, where we are careful and cautious in how we underwrite our customers in the first place, and then once the policy is in place, we trust them to manage the business as they have been doing for many years.”

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