The recent market turbulence, as a result of proposed changes in tariffs, presents new challenges for corporates and especially those who either sell on unsecured payment terms or buy from suppliers who offer payment terms. This article aims to illuminate the short-term credit insurance sector’s role in global trade and their potential responses to this challenge. We also provide guidance for corporates in managing the risks of buyer default, managing the ‘invisible’ stakeholder and the importance of engaging with credit insurers.
Dominated by three key players – Allianz Trade, Coface, and Atradius – these companies represent the lion’s share, with approximately 70% of global risk capacity in the short-term credit insurance sector. Their comprehensive coverage protects against corporate default and extends to non-payment triggered by political events such as currency inconvertibility, import/export license cancellations and expropriation.
Other significant players in the credit risk transfer market are AIG, Markel, Chubb, QBE, TMHCC, Zurich, Mercury, Cartan and Liberty.
Governmental Export Credit Agencies (ECAs) are also important, especially where private markets have constraints. Some ECAs are more political in nature and can subsidize the cost of credit risk transfer for exports.
The services of credit insurers span approximately 10-15% of the world’s trade, bolstering the liquidity of business to business (B2B) transactions. In the context of a global GDP of some $115 trillion, they insure an exposure of around $10 trillion per year in B2B transactions. That is, they take the risk of non-payment, enabling insured corporates to offer extended unsecured payment terms in the confidence that if there is a default they will be reimbursed by the insurer. In times of economic turbulence, they will engage in scenario planning to ensure resilient risk management. Beyond mere exposure reduction they will adjust pricing, indemnity levels, risk horizon – indicating good governance and risk management for both them and their insured clients. They mine vast amounts of data related to risk profiling, from publicly available financial data through to confidential payment profiles. Alongside the credit reference agencies, they have all developed proprietary methodology to predict non-payment risk. The recent market shocks will certainly have resulted in a rapid reassessment of both corporate and country risk.
During the Global Financial Crisis (GFC) of 2007-2008, the reaction of the trade credit insurance industry was to reduce credit insurance capacity. This had a significant impact on corporates. Many companies who insured their receivables found buyer credit limits were reduced or canceled, leaving them with one choice: to stop selling to that buyer or take the risk themselves. Companies of course make their own decisions on who to trade with and how, but a red flag from an insurer (typified by a Credit Limit cancellation) often resulted in the corporate reducing the line of credit they may have previously offered to their buyers. Note: not every supplier credit insures but, for those that do, many rely on funding which is linked to the underlying credit insurance limits. If the limit was canceled, then not only would they have to take the risk themselves, but they would not be able to fund the transaction – further denting liquidity. This then plays out throughout the supply chain as credit lines get squeezed. The COVID-19 pandemic saw a similar reaction by the credit insurance industry. However, many European governments have provided state undertakings to cover claims paid by credit insurers.
The proposed tariff regime, coupled with a rapidly changing geopolitical environment and heightened global risks, has created a volatile economic environment. This volatility is expected to lead to:
The spectre of corporate insolvency is a top concern for credit insurers and one that always demands action. Below are some proactive steps to manage relationships with credit insurers.
Identify stakeholders: Determine which of your current suppliers use credit insurance and who their insurers are. This information enables you to react quickly to any specific challenges caused by a supply side credit squeeze.
Update information: Ensure credit insurers are equipped with the latest data on your organization. Publicly available information, such as court cases or negative press, can directly influence credit ratings.
Timely payments: Pay all suppliers promptly to maintain a high credit rating. Overdue payments can trigger concerns and diminish a company’s creditworthiness.
Engage with insurers: Have open and regular dialogue with insurance partners, sharing management information and financial statements to build confidence in the businesses.
We’re likely to see credit insurers reassess their risk appetites in the current period of market volatility. While we haven’t seen knee-jerk reactions or widespread changes, all insurers are closely monitoring the situation. Insurers are particularly focused on the retail, automotive and metals sectors.
Businesses can take several proactive steps to address the situation, such as engaging with insurers to build confidence and exploring various tools to mitigate non-payment risks, such as those identified above. These steps can help businesses manage the challenges posed by economic volatility and preserve their financial stability.
For more information on tariffs and credit insurance, please contact our trade credit team.
