Trade credit insurance has always been a popular tool for manufacturers to help manage their trade credit risk. PES reported this week trade credit insurance could be proving a major issue for manufacturers, with cover being reduced or taken away altogether.
Tom Rolfe, a credit risk specialist at The Channel Partnership, looks at how trade credit insurers are themselves coping with their manufacturing clients as they get to grips with the Covid-19.
Voices of concern are being raised from manufacturers that their insurance policies may fail to pay out in light of Covid-19. All areas of business insurance are struggling, and none more so than trade credit insurance. As a broker with more than 20 years’ experience, I have never seen anything quite like this crisis – and it really is unprecedented.
But right from the outset, credit insurers have been clear that they will not be using Covid-19 as an excuse to avoid paying claims. To put this in context, insolvencies in the UK will increase by around 30% as a result of the pandemic, and trade credit insurers expect to pay £3 in claims for every £1 received in premiums.
Pressure was applied to the UK Government to provide a support package for credit insurers, effectively guaranteeing their losses, and the acknowledgement of support was acknowledged in an announcement on 13th May. It mirrors the approach of several other European states. By announcing support for their domestic credit insurers, these governments have therefore provided support for companies trading on credit terms. The support will come as a relief to manufacturers as well as insurers that claims will be backed financially.
Credit insurance is insurance against a moving target. While it is an annual policy which covers “trade debtors”, the make-up of those trade debtors will change as the year progresses. Our clients will want to add new customers to their list of insured companies and may no longer trade with others that they wanted to insure on day one.
Also, companies will change during the course of the year – for better or worse – and their performance will improve or deteriorate, their payment practice may change, they may be bought out or they might make acquisitions.
So a company that is seen as an insurable risk on day one of a credit insurance policy may not be an insurable risk on day 60, day 100, day 364. Part of the “sell” of credit insurance is that the credit insurers get more current information on the performance of companies than anyone else and so they can help insured clients avoid, or minimise, bad debts by guiding clients away from companies that look like bad risks.
Insurers can no longer continue to cover companies who went into the Covid-19 lockdown without the financial resilience to survive the impact. Insurance can never be removed retrospectively, if cover is taken away, and it is only taken away for all future orders or all future contracts (depending on the policy).
But debts taken on while the cover was in place remain insured until they are paid for. This gives manufacturers with cover in place some reassurance they are managing their credit risk.
The crisis is extraordinary because even a customer that looked solid just a few weeks ago may now have serious problems; problems that are not visible on their balance sheet or credit score. And it is the quality of information held by credit insurers that will identify when a customer is at risk, and that serves to protect you.
It has been incredibly tough for us, and for so many businesses, to batten down the hatches and see this crisis through. Our focus on keeping clients informed, while giving them protection in case those slow payments become no payment, has worked in our favour. It’s kept us focused, and it’s kept the phone ringing because we can look deeper at what our insurer panel know about businesses and sectors.
The Channel Partnership www.the-channel-partnership.co.uk