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COVID-19 and Trade Credit

January 15, 2021

Following the Covid-19 outbreak in 2020 and subsequent lockdowns, the market for trade credit insurance changed virtually overnight.
Credit, Political Risk and Terrorism
Pandemic Risk and Response

In May of this year, Willis Tower Watson focused our Trade Credit Update based upon the industry impact of the COVID-19 pandemic. The article focused on the events leading up to the impact, insurers’ reactions between the cancellable and non-cancellable limits markets, outlook for new business submissions, anticipated renewal actions and potential impacts on various reinsurance schemes.

Trade Credit Insurer Reaction

Following the outbreak in February/March and subsequent lockdowns in April/May, the market for trade credit insurance changed virtually overnight. Prior to March of this year, the market was following more than a decade’s worth of market softening terms and rates, which was driven by strong economic growth, low insolvency rates and increased capacity from both soft market conditions and with new insurance carriers in the trade credit market. Pricing was at historic lows, capacity at an all-time high and policy structures were extremely flexible.

In less than one month’s time, following the widespread outbreak and subsequent lockdowns, underwriting appetites, structures and pricing changed dramatically, which had an immediate impact on the market.

Insurers’ Coverage Actions

Cancellable limit insurers were the first to act by invoking their right to withdraw individual credit limit decisions due to perceived imminent losses. Each of the cancellable limit insurers took a slightly different approach, ranging from broad-brush withdrawals throughout an entire industry sector to cancelling any buyer risk with a certain internal grading profile.

Cancellable limit insurers were the first to act by invoking their right to withdraw individual credit limit decisions due to perceived imminent losses.

While these actions created challenges for clients, the blow was softened by Delayed Effect of Limit Cancellation clauses found within existing policy structures. As we noted in our last newsletter, Willis Towers Watson saw the downturn as a true test to the “Delayed Effect” features of the cancellable insurers.

Fortunately, with the exception of some extremely rare cases found on individual buyer risks, the cancellable limit insurers all honored their Delayed Effect language. In many instances the insurers continued the courtesy of advanced “Heads Up” notices of buyer limit cancellations, thus providing our clients time, both before and after the withdraw actions, to find alternative risk mitigation solutions.

Non-cancellable insurers, by their own definition, were not able to invoke withdrawals to named-buyer limits. With that said, any limits with conditional early expirations, downgrade clauses, or financial disclosure requirements were met with severe scrutiny. As these limits incurred a trigger conditioned on the previous approval, insurers typically required current financial statements and a narrative detailing the impact that the pandemic was having on the businesses short and long-term outlooks prior to extending coverage.

Insurers’ Renewal Action

In addition to de-leveraging the credit limits within their portfolio, insurers also capitalized on the opportunity to implement higher rates while modifying other conditions within the policy in order to support their renewals moving forward. While limit actions became massive projects that took time to organize and implement, commercial maneuvers began immediately after it became clear that the impact of the COVID pandemic and the economic recovery will carry on into the unforeseen future.

Cancellable limit carriers began instituting premium rate increases unilaterally across the board for all policy renewals. Customers were classified by both loss ratio and trade sector as a baseline for pricing increases. Most clients with zero claims or low loss ratios during the past year have incurred a minimum of 5-15% pricing increases, with most settling in the 5-10% range. Clients deemed loss making – those with a 3-year loss ratio in excess of 60% - were often presented with more extreme pricing increases of 15-25%, with some clients even seeing price increases over 50% depending on their loss history and trade sector.

insurers are also instituting measures within the policy structure to control exposure.

In addition to pricing increases, insurers are also instituting measures within the policy structure to control exposure. Deductibles have been introduced or increased, system generated automatic approval methodologies have been tightened, and Maximum Liabilities have been decreased. Perhaps most significant is the impact to Discretionary Credit Limits (DCL), whereby they are either being removed, reduced, or left in place but only if subject to an increased deductible. Historically, DCL levels have been structured as a multiplier of the Aggregate First Loss Deductible (AFL). Many carriers have now inversed this ratio and are presenting initial offers with AFL’s that are 1.5 to 2 times the amount of the corresponding DCL.

To date, Willis Towers Watson has been extremely successful negotiating with the insurers to find a balanced approach to help minimize the impact of the hardening market terms for both renewal and new business opportunities. Many members of our team have previous underwriting experience with various major credit insurers and have also navigated throughout the Global Financial Crisis in 2008 as underwriters. This sets our team apart and allows us to find creative solutions while finding the correct balance for both our clients and the insurance markets.

Insurers’ New Business Action

  • Both cancellable and non-cancellable insurers have remained exceptionally selective in their approach to new business. As previously mentioned, we continue to see:
  • Insurers requiring a deeper level of information to bolster and support their position prior to providing indications of terms;
  • Risk and commercial decisions requiring more involvement and escalation to senior management levels prior to release of any indications;
  • Indications being valid only for one or two months due to concerns about the fluidity of the market; and
  • Difficulty with effectively marketing or remarketing policies in sectors that are heavily impacted by the recent economic downturn.

In addition, risk acceptance rates at the time of binding have fallen due to the insurers requiring more financial disclosure prior to agreeing to insured credit limits. In the past, insurers could potentially stretch to $250,000 (or even up to $500,000) without financial disclosure. However, that is no longer the case. Insurers are now capping limit decisions based on “soft information” generally in the $100,000 - $200,000 range. This change has led risk appetite percentages plummeting from historical target levels of 85-95% at the time of policy inception to 65-85% today.

The positive takeaway here is that the coverage granted is generally viewed as more sustainable and less likely to incur any near-term action. Furthermore, the lower initial risk acceptance position stands as a starting point of coverage, as insurers remain open to receiving updated information from their clients in order to work together towards higher risk acceptance percentages across the portfolio.

Looking Ahead

While a lot has transpired in recent months and uncertainty abounds, the trade credit market itself has settled into what seems to be a state of calm. The market has hardened and retained the impacts noted above. However, insurers are beginning to lessen non-renewal notifications and further tightening of structure and pricing is not anticipated. Requests for new or increased capacity are requiring more upfront information and limit withdraws have subsided. All three of the leading cancellable insurers have indicated that, barring a “second wave” of COVID lockdowns, they do not anticipate a need for further mass withdrawal exercises.

While a lot has transpired in recent months and uncertainty abounds, the trade credit market itself has settled into what seems to be a state of calm.

For upcoming renewals, we are advising our clients to start discussions earlier than usual. Clients will want to begin discussing renewal options with their broker three to four months prior to policy expiration and should be sending requests for renewal terms and remarketing applications to alternative markets at least two full months before expiration. For larger programs with greater than fifty named buyers, we advise clients to approach markets at least three months before expiration. This segment of clients should be prepared for the pricing and structure changes we mentioned, as well as discuss potential alternatives with us.

While we are in a hard market, it is still a great time for newcomers to secure trade credit insurance or for those looking to expand their current programs. This is particularly true for clients in preferred trade sectors, with no or low loss experience, and with access to buyer financial information. Insurers are still keen on growing their books of business and achieving levels of new business premium.

This will intensify as we push through the fourth quarter of the year and continue into the early days of 2021, as insurers will look to begin the year on a positive note. Sectors that the insurers are targeting currently include:

  • Agriculture
  • Chemicals
  • Electronics/ ICT
  • Financial Services
  • Machine/ Engineering
  • Pharmaceuticals
  • Services

We have also continued to see a rise in demand for the trade credit product for financing purposes.

We have also continued to see a rise in demand for the trade credit product for financing purposes. With economic conditions tightening the lending standards and creating a strain on liquidity, there has been a strong demand for trade credit insurance programs to support AR based lending facilities, receivables purchase programs and securitizations. These programs continue to remain of interest to clients, financiers and insurers leading to a further evolution of the product.


In summary, after more than a decade of softening market conditions and rapid expansion, both the trade credit insurance industry and greater economy were both overdue for a market correction. The COVID-19 pandemic accelerated that correction and the compounding influence of political policy and an election year have led to further hardening of the market. With that said, markets have remained open for business, insurers have become even more creative in adding sustainable risk, and most importantly, claims have continued to be paid without incident.

Please contact your local Willis Towers Watson representative to explore what Trade Credit Insurance options may be available to you and your firm.


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