Best's Review


Industry Updates
Backstop Needed

Citing Europe and Canada, trade credit insurers seek U.S. government reinsurance in volatile market.
  • David Pilla
  • July 2020
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Sridhar Manyem

Sridhar Manyem

As countries worldwide seek solutions to unprecedented business disruptions caused by the COVID-19 pandemic, trade credit insurers warn that the U.S. market needs a government reinsurance backstop similar to those in place in many Western countries.

“What's happening now in the COVID-19 crisis is that most companies' supply chains have just locked up,” said James Daly, chief executive officer, Euler Hermes North America. “When we're looking at the creditworthiness of companies it's completely disintegrating in many sectors, particularly bricks-and-mortar retail, tourism and hospitality. So we're reducing our exposure.” Leaders in the U.S. trade credit insurance market developed a working group to engage U.S. government entities on the feasibility of a government reinsurance plan to reduce a liquidity shortfall in volatile markets, said Daly.

“We think it's an important initiative for the United States, which follows what other governments were doing,” said Scott B. Ettien, global head of trade credit financial solutions, Willis Towers Watson. “Over the next two quarters, the financials will reflect negative trends and the credit insurance carriers will need further reinsurance support to help suppliers and service providers provide open-term working capital to these companies on the way out of this crisis,” he said.

“Trade credit is not as often thought about, but a critical piece of the puzzle that needs to be present as economies reel and recover from the effects of the COVID-19 pandemic,” Sridhar Manyem, director, AM Best, said in written comment. “Trade credit insurance provides peace of mind to suppliers and businesses that their insurers will step in when their expected working capital (from their customers and suppliers) does not materialize. During a period of anemic economic conditions when confidence is low, trade credit insurance will be an important aspect of recovery.”

Manyem noted in a global economy with supply chains that span multiple geographies, underwriting trade credit insurance “is complicated by the economic conditions under which insolvencies and bankruptcies will be on the rise.” He said insurers “may not think the risk is worth the reward and may not even offer the product in the short term when the risk is high both on the political spectrum (government-mandated shutdowns, restrictions on travel) and business spectrum (unprecedented economic conditions).”

A recent Best's Commentary said the short-tail nature of the trade credit product may partially offset the negative impacts, allowing for insurers to reprice and de-risk their portfolios, although incurred losses could be significant and involve costly litigation.

Any U.S. government reinsurance scheme needs to be in place and ready to go as an option for carriers to provide capacity “on the way out of this cycle,” Ettien said. “We're setting this up for future generations and future crises. It's going to take more time and effort for our industry to get this thing ready to go but once we have it in place, it will be a model that can be used in any mini-downturn or sector downturn.”

“We're eager to get the word out,” said Oscar Villalonga, president and chief executive officer, North America, for trade credit insurer Coface. “It's a very early stage for us. We have come together because globally trade credit insurance is very well-known and accepted, particularly in European countries.”

Noting the effort was “kicked off” by Daly at Euler Hermes, Ettien said Daly “wanted to see if we could coordinate market support for the initiative of obtaining government reinsurance throughout this downturn and as we dig out, where it will be needed the most.”

Daly said the group is working with trade associations, brokers and banks and would like to approach the U.S. Treasury, Department of Commerce and Federal Reserve.

Trade credit insurers Euler Hermes, Atradius and Coface engaged with Wilmer Hale, an international law firm with expertise in Washington, “to take the first steps” including drafting a position paper on trade credit, said Ettien.

Those three insurers make up the bulk of the market in the United States, said Ettien. He said there are about 13 other companies that provide trade credit but not with the magnitude of those three.

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