How has the COVID-19 pandemic impacted commerce credit score insurance coverage?
As the seriousness of the situation became clear in March 2020, companies around the world quickly switched from office work to remote work, schools switched to remote learning, countries imposed lockdowns, travel bans and border closures, and the global economy experienced a massive shockwave. This disruption had a major impact on the global trade credit insurance market – but fortunately the market was well prepared.
Musters explained: “We were already preparing for a downturn in 2019. I’m certainly not saying we predicted COVID-19 – that would be ridiculous – but we did predict an economic slowdown. We took action back in 2019 to ensure our information and analysis of the risks we cover are as up-to-date as possible to best position ourselves and our clients for the next downturn – which we expected to be in late 2019, early 2020 .”
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When COVID struck, the world very quickly experienced a dramatic and sudden impact on the global economy from all the lockdowns, shutdowns and border closures.
“The interesting thing about this economic crisis was that it was caused by supply problems,” commented Musters. “Usually these types of recessions and slowdowns are caused by demand issues. People lose their jobs, they stop spending, and because they stop spending, demand falls and the economy goes into recession. It is very rare that it is caused by supply problems. I’m not talking about the supply chain issues that are an issue now, just supply issues of January, February, March 2020 when all factories in China suddenly shut down and this supply shortage shook economies everywhere. along with travel bans and travel issues. This had a domino effect on the entire global economy.”
Trade credit insurance protects manufacturers, retailers and service providers against losses resulting from non-payment of a trade debt. If a buyer fails to pay (often due to bankruptcy or insolvency) or pays late, trade credit insurance pays a percentage of the outstanding amount. Trade credit insurance can prevent bankruptcy, help businesses manage credit, and even provide opportunities for business expansion.
“All of these businesses – particularly restaurants, bars, travel companies and retail outlets – suddenly couldn’t open, couldn’t pay their employees and couldn’t pay their suppliers. So in April, May and June 2020 we had a huge increase in trade credit insurance claims volume at Euler Hermes,” said Musters. “We had a huge increase in volume, so we had to bring people from other parts of the business into our claims team. As an insurance company, we pride ourselves on the services and support we offer our customers in good times, but ultimately [being an insurance company] it’s about paying claims – and we’ve paid a lot of claims very quickly.”
However, according to Musters, the doom and gloom didn’t last too long. Towards the middle of 2020, the positive effects of government support programs began to be felt across industries. Temporary mitigation measures such as emergency funding, tax breaks and government-backed insurance capacity have been put in place to keep businesses and economies afloat. By and large, these measures were successful and the global economy achieved more stability, bringing trade credit insurance claims back to more normal levels by 2021.
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On the Excess of Loss (XoL) side, where Musters heads Euler Hermes’ Americas region, the impact of the pandemic has been less severe. XoL is a non-cancellable form of credit insurance that offers flexible and innovative solutions to protect businesses from extraordinary and disruptive loss events. It is typically aimed at larger companies with experienced credit management teams that accept and manage most of their trade credit risk in-house but need protection against unforeseen loss events.
“Our XoL customers haven’t seen a huge impact in terms of action or monitoring from us during COVID because we really trust 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 and most established companies in their sectors. And these are companies that want to avoid losses just like we do – even more because they bear the first part of the losses themselves, so they monitor the risks very closely.
“In the XoL market during COVID, the claims for Euler Hermes and the other carriers were much lower than regular trade credit insurance. I think it’s because we’re all very picky about the type of businesses we want to insure. We sell the product to companies that we trust to manage the risk themselves and they have done so. So I think this very much proves the XoL model where first and foremost we underwrite our clients carefully and cautiously and then once the policy is in place trust them to run the business the way they did many years.”