CM magazine Nov2021

OPINION
The waiting game
COVID-19 and its impact on credit insurance.
AUTHOR – Simon Philpin
SINCE the pandemic began, it’s
been a rollercoaster of a ride in the
credit insurance world. When the
pandemic spread to Asia, the trade
credit impact followed the flow,
where we saw extended payment
terms being requested in Asia, the Middle East,
Europe, North America and finally, in South
America.
In Q1 2020, the credit insurance industry was
seriously concerned about the potential fallout
of claims on the entire industry. If the world was
in lockdown with businesses not trading and
not generating cash, this would ultimately lead
to insolvencies or default scenarios… or so we
thought.
Before COVID-19, the last significant event
to impact the trade credit industry was the
2008-2009 global financial crisis. At the time,
many businesses were underperforming,
which is why a large portion of the industry
acted by withdrawing significant amounts of
credit cover. This resulted in poor relationships
between insurers and brokers for many
years. During the global financial crisis, a UK
Government scheme was introduced to assist
the industry, but it could only be utilised if the
underlying insurer was still supporting the risk,
and in most cases, this wasn’t the case.
LESSONS LEARNED
Neither insurers nor brokers wanted a repeat of
2008-2009, particularly as credit insurance has
grown as a tool to obtain finance when financing
receivables, and a reduction in insurance would
have hit UK businesses and created a negative
financial impact. Accordingly, negotiations
with Government were swift, and a facility was
put in place from 1 April 2020, covering the
initial lockdown period and ending 30 June 2021
as the business economy started to return to
some level of normality.
As an industry, we anticipated a tsunami of
losses due to businesses being unable to trade
to generate cash to meet their liabilities. This
wasn’t just our industry, as many economists
around the world were predicting armageddon
scenarios which didn’t materialise.
Governments stepped up to not only provide
the insurance-backed scheme and stimulus
packages such as the furlough scheme and
business interruption loans, but also made
changes to UK insolvency laws, which made it
difficult to force a business into administration.
All those schemes worked very well because the
UK was awash with cash and thus, the expected
losses via claim pay-outs did not materialise.
The big question now is: did the scheme end
too early? In Q4 2021 and Q1 2022, we will see
whether businesses are able to survive on their
own without any support.
There were two main reasons why insurers
decided to end the scheme on 30 June 2021. The
first reason was the benign environment, where
we were not seeing any losses. The second
reason was that all insurers who wanted to be
a part of the scheme had to cede 100 percent
of their premium less costs. Therefore, the UK
Government was receiving millions to back
the scheme and insurers were being impacted
on their own performance, with each one also
having shareholders to answer to at AGMs.
LOOKING AHEAD
So what are we now seeing after the Government
scheme? It’s still very early days and insolvencies
still have not materialised in the way they
were envisaged. This could change, however,
particularly as the UK insolvency law returns to
normal in Q4 2021. We are also seeing insurers
being quite competitive in H2 2021, as they try
to recover lost revenue and get back to building
their portfolios. In addition, some broker
discussions that have circulated suggests that it
is a little tough in the market at the moment,
due to the fact we are seeing a historic low level
of claims, but the market does ebb and flow
and it can only take one loss in a sector for our
product to see a significant rise in enquiries.
The one side of the market which is doing
well in 2021 is the non-cancellable insurance
providers, a product we have considerable
experience of at Markel. In uncertain times,
businesses want certainty of cover and a
non-cancellable insurance solution certainly
provides the comfort, especially if the insured is
financing their receivables. After all, no finance
director wants their finances being impacted
by a credit insurer. Given the market is very
competitive, there couldn’t be a better time to
secure your receivables, particularly if you are
seeing additional finance with the assistance of
a credit insurance policy.
Simon Philpin is Senior Underwriter and Head
of Business Development Global – Trade Credit
at Markel International.
Given the market is very competitive, there couldn’t be
a better time to secure your receivables.
Advancing the credit profession / www.cicm.com / November 2021 / PAGE 36