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ITFA Takes A Harmonized Step Towards Trade Credit Insurance

Trade credit

ITFA Takes A Harmonized Step Towards Trade Credit Insurance

The ITFA (International Trade and Forfaiting Association) recently released a new initiative in the form of a Basel III-compliant trade credit insurance policy form. Designed to assist insurers and financial institutions to negotiate new deals and help establish a standardized Basel III policy, the IFTA’s initiative also represents an effort to help trade credit insurers in an era where insurance companies are seriously re-evaluating how they operate.

Trade credit insurers, and the insurance industry as a whole, have been greatly challenged by the economic fallout created by the pandemic and the lockdowns. The frequency of insolvencies from commercial customers due to financial difficulty has risen greatly. Normally, credit insurers would cancel (or at least limit) coverage for buyers who display signs of being unable to pay. 

But due to the serious economic situation created by the pandemic, there is now the dramatically increased risk of trade credit being withdrawn across the board. In this article, we’ll cover why insurance plans including TCIs have become more relevant since the start of the pandemic, how the IFTA’s new policy should help trade insurers, and then what we can expect the near future to look like for the insurance industry overall.

What is trade credit insurance?

Trade credit insurance, or TCI, protects businesses against the inability of commercial customers to pay for services or products. The inability of customers to pay may result from financial woes, bankruptcy, societal upheaval, or other factors. The purpose of a TCI plan is therefore to help businesses ensure they still receive proper cash flow as a result of doing business with a customer who won’t or can’t pay. Banks, in particular, utilize trade credit insurance for capital relief and to reduce financial risk when conducting transactions. 

In many industries, it’s common for customers to take out a line of credit in order to make a large purchase. Of course, any business that lends money to customers is taking a risk that the total amount lent (in addition to any interest) will not be repaid. It’s even a greater risk when the debt is unsecured and there is no collateral to reinforce the loan. 

A comprehensive TCI plan will compensate a business for any unpaid debt, depending on what the coverage limits and other details of the plan are. Since most lines of credit that businesses give for large purchases are unsecured, having a TCI plan in place will mitigate much of the risk. In other words, businesses with a TCI plan at the very least should be more comfortable with extending lines of credit to customers, and they will have a backup plan in the event that the entire debt is not paid. 

Why the pandemic has demonstrated a need for insurance 

Due to greater financial uncertainty since the pandemic began, there has been a drastic increase in the number of businesses and individuals alike applying for insurance coverage. It’s not just TCI plans either. The number of business owners applying for life insurance coverage, for instance, has increased dramatically as a means to protect their financial assets in the event that the worse happens.

It’s not hard to see why. Covid has proven to be deadly for patients who are older and/or have existing health issues. That’s most likely why the number of adults who have purchased a life insurance plan has increased to 50% of adults in Canada and 52% of adults in the United States. 

If anything, the pandemic has demonstrated that there is a very real need for businesses and organizations to have an insurance plan (or plans) in place to help ensure financial stability in an increasingly volatile era. It’s also demonstrated a greatly increased demand for insurance coverage across a number of different policies and plans. Other insurance plans that are in greatly increased demand from business owners include general liability insurance, worker’s compensation insurance, and commercial property insurance. 

And now that insurance companies (in general) are experiencing much higher demand since the start of the pandemic, there is much more uncertainty in regards to the timing and extent of claims, as well as the fact that most insurance agencies are being forced to increase premiums and raise additional capital to help reverse the decrease in return on equity. Like the businesses they are insuring, insurance companies themselves are likewise at increased risk.

Even though the policy by the ITFA is in regards to trade credit specifically, it may provide us with a blueprint on how risks and costs may be reduced for insurance companies overall as well as the financial institutions they work with. 

What does the ITFA’s new policy form do?

Basel III is an international regulatory framework that was made as a response to the 2008 financial crisis. The new ‘harmonized’ Basel III-compliant policy form that was released is designed to help insurance companies and banks negotiate new deals as well as standardize a trade credit policy. 

The new form covers receivables policies and is intended to generate more insurable opportunities while keeping costs and time spent to a minimum. As noted previously, banks and financial institutions often rely on TCIs for capital relief and to keep risk to a minimum. The issue, however, is that banks and TCI agencies often each possess their own Basel III policy forms. 

When a bank and TCI agency attempt to work together, many hours or even days are spent on negotiating forms. This is difficult because all forms being negotiated are kept confidential and much work goes into settling on similar wording. Needless to say, negotiations can be extended and expensive. 

The goal of the ITFA’s form is to ‘harmonize’ wording during negotiations between banks and insurance companies so that two primary goals are accomplished: one, that insurance carriers can more clearly based on their services provided and the details of their policies versus policy wordings, and so that banks can focus more on their pricing. To put it into simpler terms, it aims to standardize how insurance policies are worded. 

As Sean Edwards, the CEO and Chairman of ITFA stated at the 2021 ITFA conference, “Consistency, predictability and a reliable form is paramount to regulatory bodies further recognizing trade credit insurance as a viable risk transfer mechanism for capital substitution. We need all banks, insurance companies, law firms, and brokers moving in the same direction if we are to grow the overall industry.”

Streamlining policy negotiations between banks and insurance companies with standardized wording is certainly one way to provide relief to insurance companies, and one that could be applied to other insurance companies outside of TCI carriers as well. 

Other actions include governments offering their support to insurance markets by guaranteeing transactions made by insurance companies through reinsurance agreements and, in the case of the European Union, having export credit agencies ensure short-term trading risks instead of private insurance companies. 

Conclusion

As the world starts to emerge out of the economic crisis generated by the pandemic, private businesses, banks, and insurance companies are all at greater risk than they were before. Insurance companies including TCIs are in a position where their services are in much greater demand than before, and they need to minimize financial losses. The move by the ITFA to standardize language and streamline negotiations between banks and insurers is one-way costs can be reduced. 

african

African Free Trade Area Presents Opportunity and Obstacles Ahead

The African continent is on the cusp of long-term economic opportunity thanks to the inception of the African Continental Free Trade Area (AfCFTA), which came into effect in January 2021. The AfCFTA could boost Africa’s growth potential as the agreement intends to liberalize trade across Africa over the next few years. It provides optimism for a region that has been hit hard by the pandemic.

The impact of the pandemic has been uneven across African economies, with some suffering from severe economic contractions, while others managed to record small growth rates. The post-pandemic outlook differs from country-to-country, but most are subject to high uncertainty due to the rise in infections and the slow vaccination process. In the long run, the AfCFTA could be pivotal in Africa’s growth potential as the agreement foresees fundamental freedom of trade in Africa in the next few years.

The agreement has the potential to accelerate African growth rates after the negative impact of the COVID-19 pandemic, according to a recent economic outlook report for the Sub-Saharan Africa (SSA) region from trade credit insurer Atradius.


Early optics reveal uneven results

While long-term results of the implementation of the AfCFTA, the immediate optics are not looking promising for most countries. Some challenges have to be overcome before the AfCFTA is successfully implemented and countries can reap the benefits. In the short run, protectionist tendencies, insufficient capacity to expand cross-border infrastructure, political instability and weak government finances, among other things hinder a full implementation of the agreement.

The AfCFTA’s full implementation has a long way to go, with several countries needing to first establish the necessary customs infrastructure and required procedures to trade. Countries that already have action plans and customs procedures in place, as well as relatively low barriers to trade with other African countries, will likely see success early on. So far, only Egypt, Ghana and South Africa have accomplished the necessary customs infrastructure. Countries that are likely to benefit the most are those with relatively open and diversified economies and well-established trade links, like South Africa. This also applies to other regional trading hubs such as Kenya, Senegal and Cote d’Ivoire.

Economies emerge from harsh COVID effects

Last year’s economic contraction of 1% was the lowest ever witnessed in the region and was stark in comparison to average annual growth of 4.3% since 2010. COVID-19 hit African countries with a drop in trade, lower commodity prices, fewer tourist arrivals, lower remittances and lower foreign investments. Additionally, many countries introduced strict lockdowns in the beginning of the pandemic that hurt domestic economic activity.

Thankfully, 2021 has seen a recovery in the global economy and higher commodity prices, supporting the economic recovery in Africa. Economic growth is expected to reach 1.3% this year. A recovery that is quite moderate, especially in comparison to other regions in the world. Reasons for this are the limited room for government support and the slow vaccine distribution. Similar to other parts of the world, many African governments supported their economies resulting in high budget deficits and an increase in public debt. Now, many face high debt levels that will limit further support and even constrain public investments over the next few years. Therefore, many countries are not expected to return to their pre-pandemic growth figures. The economic outlook is also uncertain due the continued spread of COVID-19 coupled with the slow vaccination process.

Uneven recovery underway for Sub-Saharan Africa

While there is an economic recovery underway for SSA, it will be slow and mostly uneven throughout the region. Oil exporting countries, hit hard by the pandemic, like Nigeria and Angola, will see a particularly slow recovery. Small island economies dependent on tourism, like Mauritius, which recorded deep recessions last year will likely see one of the highest economic growth figures in Africa this year. However, this is still uncertain, as it depends on the expected gradual recovery in tourism.

The more diversified economies fared relatively well through the pandemic and will have a strong economic recovery. Countries such as Kenya, Ghana and Côte d’Ivoire recorded a small contraction or even a positive economic growth last year and are among the top performers.

Opportunities for the region could be on the horizon in the form of the African Continental Free Trade Area (AfCFTA). Although in the short term there is much to overcome, once it reaches full implementation on the longer term, it is set to benefit several African economies.

_______________________________________________________________

Afke Zeilstra is a senior economist for Atradius

eastern europe

Businesses in Eastern Europe Enter 2021 Battered – But Hopeful

The lasting impact of the global pandemic on businesses in Eastern Europe is yet to be seen. Atradius recently released the Eastern Europe Payment Practices Barometer, an annual survey that assesses business payment behavior throughout the world. The prevailing safeguard that many businesses implemented to protect vital assets this year was trade credit insurance.

The protection of trade receivables from the risk of customer payment default is vital for these businesses. Three out of five businesses interviewed reported that they have used trade credit insurance during the pandemic and a significant percent indicated they intend to employ credit insurance next year. This is a clear indication that businesses in Eastern Europe are taking a strategic approach to credit management during the pandemic, which is vital as the global recession continues to pose new and unforeseen challenges.

Business challenges ahead

The majority of Eastern European businesses surveyed said that a decrease in demand represents the greatest challenge to their business. Other challenges to business profitability include maintaining adequate cash flow, collecting outstanding invoices and containing costs.

Not all businesses in Eastern Europe faired the same. Businesses in Bulgaria and Slovakia experienced devastating blows to revenue and cash flow, while businesses in Turkey reported the smallest negative impacts on revenue, cash flow, and sales volume in the region.

Part of the secret to Turkey’s success is a strong, proactive approach to credit management in past years, but especially this year. Businesses in Turkey explicitly stated that they will continue using trade credit insurance in the coming years, which is a distinctive feature of Turkey’s success in the Eastern Europe economic region.

The Payment Practices Barometer has enabled us to evaluate business confidence both before and during the pandemic and recession. Some of the benchmark indicators are shocking, like an 88% rise in overdue invoices, and severe revenue shortfalls felt by almost 60% of businesses in the region during the pandemic.

The toll on industry sectors

The industries across Eastern Europe feeling the greatest shock include hospitality, tourism, and non-essential services. Certain food industries and chemicals are faring slightly better across Eastern Europe if they were able to continue production during lockdowns.

Businesses surveyed in the agri-food, chemicals, steel-metals and ICT/electronics industries mostly shared an optimistic outlook about the future of the domestic economy in their country. Those operating in the electronics industry reported 63% of respondents expecting an improvement in the domestic economy in the coming months while Hungarian businesses in this sector were the most optimistic.

Hope for 2021

Businesses in Eastern Europe are approaching 2021 with cautious optimism. After months of various lockdown measures, reduced consumption and supply-side shocks wreaked havoc on emerging and developed economies alike, a significant proportion of businesses expressed optimism and hope about the coming year. This was most clearly expressed by businesses discussing the future of their domestic economies. Businesses in Turkey and Hungary were particularly upbeat in their assessments of their respective domestic economies in 2021.

The opinion about the global economy is less bright, with 43% of survey respondents predicting a decline in the coming year. For businesses worldwide, the next months are critical. Continued lockdowns may have a severe impact on economic development and rebuilding credit.

Outsourcing credit risk management to external professionals gives businesses a powerful tool that helps securely grow revenues in an unstable time. Credit insurance is designed to help businesses trade safely with more profits while mitigating the risk of customer payment default and other financial pitfalls that can be devastating to an already struggling business.

Much of what the next six months hold is unknown. Around the world, varying degrees of shut down and business as usual are shaping the future for business in each region. With the virus not yet under control in many key economies, it is too soon to say which countries will see strong rebounds and in which industry sectors. What we can see, however, is the strategic approach to credit management in Eastern Europe helping industries securely grow their business while protecting their assets in the uncertain months ahead.

_____________________________________________________________________

Silvia Ungaro is a Corporate Communications Manager at Atradius, a global trade credit insurer. She is responsible for the Payment Practices Barometer survey of B2B payment behavior.

payment

Survey Finds Dramatic Increase in Overdue Payments in North America

Will North American businesses remain resilient in the face of COVID-19 challenges? That answer is increasingly difficult to answer in the affirmative, as virus containment measures continue to negatively impact trade, consumer spending, industrial production, unemployment, corporate debt and supply chains.

According to the annual Payment Practices Barometer survey of businesses in the U.S., Mexico and Canada by trade credit insurer Atradius, companies are facing widespread cash and liquidity pressures. Survey data was collected this spring, and conditions have likely deteriorated further. News recently broke, for instance, that the coronavirus caused the U.S. economy to contract 32.9% in Q2, the worst contraction in modern history.

Needless to say, the bleak economic outlook puts businesses in an extremely tight spot, and it is likely insolvencies will rise dramatically, further exacerbating liquidity challenges among organizations in the supply chain. Some troubling signs of deteriorating payment practices and B2B customer credit risk captured in the survey include:

-Overdue payments have increased dramatically. Across the region, 43% of the total value of issued invoices remain unpaid by the due date, a sharp increase from the 25% reported last year.

-The value of invoices overdue by 90 days or more has doubled to 13%.

-Businesses write off 4% of the total value of outstanding invoices, up from 3% in 2019.

The increase in payment defaults is particularly alarming in the U.S., which saw a 72% year-over-year uptick compared to 2019, and in Canada, which saw an 86% increase. In Mexico, the amount of trade receivables firms have written off has doubled since last year.

These trends put a troubling burden on businesses, which end up having to spend more time, resources and funds chasing down overdue invoices. It also means working capital is tied up for longer than before, limiting businesses’ abilities to pay their own suppliers and make strategic investments. In short, rampant late payments cause a bad domino effect, spreading liquidity issues all throughout the supply chain.

UMSCA Firms Are Tightening Credit Controls

Faced with heightened B2B customer credit risk, many businesses across North America are tightening their credit control procedures, the Payment Practices Barometer found.

Firms typically rely on a mix of outsourced risk management, such as credit insurance, and internal tactics such as reducing risk concentrations and increasing debt collection resources. Notably, more than half of the region’s survey respondents plan on upping the efficiency of their debt collection processes through tactics such as payment reminders or outsourcing collections to an agency.

The Payment Practices Barometer also found that while credit-based B2B sales are on the rise across the region, the trend is slowing. Self-insurance against the risk of payment defaults also saw an increase – 66% of businesses rely on this tool compared to 22% last year.

The most prevalent methods of credit control vary by country:

-Many Canadian firms are planning on adjusting payment terms to better align with the credit capacity of customers – average payment terms are now 26 days, compared to 27 days in 2019. They also widely employ payment reminders and work to avoid concentrations of credit risk.

-In Mexico, a significant proportion of businesses employ credit insurance. Additional popular credit management tactics include suspending deliveries until outstanding invoices are paid, requesting payment on cash from B2B customers and requesting payment guarantees.

-U.S. firms focus more on credit management than their peers in the region. A large majority of U.S. businesses manage customer credit risk in-house through self-insurance. Requiring payment guarantees prior to sales and offering discounts for early payment are also widely used tactics.

UMSCA Businesses Remain Hopeful?

Despite the bleak economic outlook and all signs pointing to widespread liquidity issues, the majority of businesses surveyed in North America predicted growth in the coming months, their optimism rooted in the belief that banks will continue to provide credit to cushion the effects of poor cash flow.

But again, that was a few months ago, and business conditions are rapidly changing for the worse. Consumer sentiment, for instance, has fallen back almost as low as in the early days of the outbreak – optimism that COVID-19 will go away any time soon is now a distant memory.

The only thing that can be said for sure is that the business environment in North America is rife with uncertainty with no indication of sunnier skies in the near future. More than ever, businesses need to take a strategic approach to credit management that ensures adequate cash flows and a solid liquidity position.

_______________________________________________________________

Gordon Cessford is the president and regional director of North America for Atradius Trade Credit Insurance, Inc

asia

Payment Practices Deteriorating Across Asia

COVID-19 is causing an unprecedented interruption in business activity across Asia as global trade is projected to plummet by as much as 15%. Businesses are up against major liquidity constraints. As a result, payment practices are deteriorating. The Payment Practices Barometer survey of businesses in the region by trade credit insurer Atradius reveals a concerning trend of rising payment default risks, bad debts and insolvencies.

Late Payments Run Rampant

The survey, which included firms in China, Hong Kong, India, Indonesia, Singapore, Taiwan and the United Arab Emirates, found that late payments affect more than half (52%) of the total value of B2B invoices issued in Asia, largely due to liquidity restraints.

China and Singapore both are trending better than the region’s average, but India and the UAE are in the opposite boat. Late payments there amount to 66% and 72%, respectively, of the total value of B2B credit sales, locking up a significant portion of working capital for weeks at a time. Payment terms in both India and the UAE are significantly longer than in other countries surveyed (UAE has the longest, with 57 days on average). Companies operating in either India or the UAE need to be aware of the situation, as it can be a notoriously difficult and long process to recover outstanding receivables through local courts.

Across the board, late payments have a negative cascading effect for Asian firms: When businesses don’t receive timely payment, they in turn delay payment of invoices to their own suppliers or turn to domestic supplier credit for short-term trade financing. Chasing overdue invoices also ends up eating up a large portion of a company’s time, resources, and funds. One silver lining here: firms in Hong Kong, Taiwan, and China appear to be quite successful in their collection efforts, indicating an overall benign business environment in these markets.

It is important to note that the survey was conducted in March 2020 and conditions have only further worsened since then. Supply chains have been thrown into chaos by the global spread of COVID-19. Major portions of the economy have been shut down for months, and it’s impossible to immediately resume normal supply chain operations. Every part of the production process is cloaked in uncertainty, causing enormous liquidity pressures. To make matters worse, after being less than fully operational for weeks or months, companies are also seeing a downgrade in their creditworthiness, making it difficult for them to obtain funding lines from banks.

Minimizing Credit Risk in the COVID-19 Era

Undoubtedly as a response to the current challenging environment, companies across Asia have expressed an increased commitment to tighter credit management.

To protect their accounts receivables, many Asian firms are increasingly turning to credit management tools and tactics, such as reducing single-buyer concentrations, self-insurance, credit insurance or demanding cash payment, letters of credit or payment guarantees. Self-insurance remains preferred for many companies in the region, especially India.

Many companies rely on a variety of tactics, and the popularity of each varies by country. In the UAE, for instance, bank guarantees and letters of credit are popular, whereas Hong Kong firms prefer to use self-insurance and trade credit insurance and Chinese businesses heavily rely on guarantees of payment prior to a credit-based sale.

Open account credit for B2B transactions is gaining popularity for Asian firms overall, as evidenced by a trend toward lengthening payment terms. The UAE leads the pack among surveyed countries in terms of percentage of the value of B2B sales made on credit (64%) and payment terms (57 days). For comparison, the regional average is 56% and 43 days.

A shift toward open account credit may be in part due to businesses wanting to offer more competitive sales terms amidst the U.S.-China tariff uncertainty or to better negotiate supply chain and trade challenges created by the pandemic. This is likely the case in Taiwan, for instance, where there was previously reluctance to use open account credit – now, credit-based B2B sales make up 54% of the total value of B2B sales, compared to 43% last year. China has also seen a reversal of typical payment practices and now more than half of B2B sales in the country are made on credit.

A Reason to Hope?

Even considering the challenging economic conditions and deteriorating payment practices, firms across Asia express optimism in the future, with many survey respondents expressing belief that both sales and profits in their industry will improve in the near term. But again, that was in March, and we have every reason to believe that this optimism has since faded.

While the total impact of the global pandemic remains murky, what is clear is that businesses throughout Asia would benefit from coherent credit management strategies that have buy-in from all parts of the business, including sales. It’s more important than ever for companies to know their customers, keep tabs on their customers’ financial standing and regularly review both their credit management strategies and the liquidity positions of trading partners.

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Gordon Cessford is the president and regional director of North America for Atradius Trade Credit Insurance, Inc.

bear

The Bear is Back: A Global Pandemic

The U.S. stock market fell into a bear market on March 12, 2020, ending the bull market that began in 2009. The bull market had begun on March 9, 2009, and peaked on February 19, 2020. The S&P 500 rose 400% between 2009 and 2020, the Dow Jones Industrials rose 351% between 2009 and 2020 and the NASDAQ Composite rose 674% between 2009 and 2020. However, since February 19, 2020, we have seen dramatic declines in all three.

Figure 1. S&P 500, 2009 to 2020

The GFD US-100 Index provides coverage beginning in 1792. By our calculation, there have been twenty-four bull and bear markets since 1792 with four occurring in the 1800s, seventeen in the 1900s, and three in the 2000s. The worst bear market was in 1929-1932, led by an 89% decline in the Dow Jones Industrials. Two prior bear markets in this century both had declines of 50% in 2000-2002 and 2007-2009. By comparison, previous bear markets, such as those occurring in 1987 and 1990, only lasted a few months before a bounce-back.

What is interesting about this current bear is how quickly and how sharply it hit markets throughout the world in response to the spread of the Coronavirus. This was a quick, simultaneous financial pandemic in every nation of the world. In many countries, the 2020 bear market is simply a continuation of the bear market that began in 2018.

The extent of the bear market in 22 countries and for global indices is provided in Table 1 which uses data from the GFDatabase. The table shows the date of the market top, the value the index hit on that date, the change from the previous market low, the current value of the market, and how much each market has fallen since the top in 2018 or 2020. The only major market in the world which has not fallen into a bear market this year is the Chinese market, the country where the coronavirus originated. However, the Chinese market had already been in a state of decline since 2015.

Figure 2. Shanghai Stock Exchange “A” Shares Index, 2010 to 2020

So far, global markets have fallen by around 30-40%. The question is, how much more are the markets likely to fall?  Will this be a short-lived bear market as occurred in 1987 and 1990 or a more extended bear market as occurred in 2000-2002 and 2007-2009?

Figure 3. United States 10-year Bond Yield, 2010 to 2020

It should be noted that fixed-income markets have already hit their bottom in the United States. This occurred on March 9 when the 10-year bond fell below 0.5% as we had previously predicted in the blog “230 Years of Data Show Rates Will Soon Hit 0.50%.” Yields have slightly risen since then. Moreover, the Shanghai Index bottomed out on February 3, 2020, when the stock market reopened after the Chinese New Year and has not participated in the worldwide sell-off. Both of these indicate that this bear market will not continue for an extended period of time. We will update Table 1 on a regular basis so our readers can follow the changes in this COVID bear market.

Table 1.  COVID Bear Market Statistics for 22 Countries and 4 Regions

 

Country

Index

Market Top

Value

Change

Market  Low

Value

Change

Asia
Australia All-Ordinaries 2/20/2020 7255.2 133.16 3/23/2020 4564.1 -37.09
China Shanghai A Shares 6/12/2015 5410.86 165.15 12/27/2018 2600.05 -51.95
Hong Kong Hang Seng 1/26/2018 33154.12 80.98 3/23/2020 21696.13 -32.76
India BSE Sensex 1/14/2020 41952.63 82.79 3/23/2020 25981.24 -38.07
Japan TOPIX 1/23/2018 1911.31 59.77 3/16/2020 1236.34 -35.31
Singapore FTSE ST All-Share 1/24/2018 877.87 40.38 3/23/2020 540.6 -38.42
South Korea Korea SE Price Index 1/29/2018 2598.19 57.21 3/19/2020 1457.64 -43.90
Taiwan Taiwan Weighted 1/14/2020 12179.81 56.41 3/19/2020 8681.34 -28.72
Europe and Africa
Belgium All-Share 4/13/2015 13859.94 104.31 3/18/2020 7202.21 -48.04
France CAC All-Tradable 2/12/2020 4732.14 56.27 3/18/2020 2888.89 -38.95
Germany CDAX Composite 1/23/2018 625.19 50.07 3/18/2020 363.83 -41.80
Italy FTSE Italia All-Share 2/19/2020 27675.06 39.43 3/12/2020 16286.37 -41.15
Netherlands All-Share Index 2/12/2020 904.31 54.15 3/18/2020 574.88 -36.43
Norway OBX Price 9/25/2018 523.06 70.44 3/16/2020 329.67 -36.92
South Africa FTSE All-Share 1/25/2018 61684.8 246.26 3/19/2020 37963 -38.46
Spain Madrid General 4/13/2015 1203.82 99.78 3/16/2020 608.26 -49.47
Sweden OMX All-Share Price 2/19/2020 732.67 68.35 3/23/2020 478.95 -34.63
Switzerland SPI Price Index 2/19/2020 731.04 140.71 3/16/2020 548.52 -24.97
United Kingdom FTSE-100 5/22/2018 7534.4 99.27 3/23/2020 4993.89 -33.72
Americas
Brazil Bovespa 1/23/2020 119528 217.51 3/23/2020 63451.55 -46.91
Canada TSE-300 2/20/2020 17944.1 51.52 3/23/2020 11228.49 -37.43
Mexico Mexico IPC 7/25/2017 51713.38 206.16 3/23/2020 32936.6 -36.31
United States DJIA 2/12/2020 29551.42 351.37 3/23/2020 18576.04 -37.14
United States S&P 500 2/19/2020 3386.15 400.52 3/23/2020 2236.7 -33.95
United States NASDAQ 2/19/2020 9817.18 58.52 3/23/2020 6860.67 -30.12
Global
Emerging Markets MSCI Emerging Free 1/29/2018 1278.53 85.69 3/23/2020 758.204 -40.7
Europe MSCI Europe 1/25/2018 1926.57 47.52 3/23/2020 1152.698 -40.16
World MSCI World 2/12/2020 2434.95 35.63 3/23/2020 1602.105 -34.2
World MSCI EAFE 1/25/2018 2186.65 46.52 3/23/2020 1354.3 -38.07

 

___________________________________________________________

Dr. Bryan Taylor is President and Chief Economist for Global Financial Data. He received his Ph.D. from Claremont Graduate University in Economics writing about the economics of the arts. He has taught both economics and finance at numerous universities in southern California and in Switzerland. He began putting together the Global Financial Database in 1990, collecting and transcribing financial and economic data from historical archives around the world. Dr. Taylor has published numerous articles and blogs based upon the Global Financial Database, the US Stocks and the GFD Indices. Dr. Taylor’s research has uncovered previously unknown aspects of financial history. He has written two books on financial history.

trade credit insurance

Trade Credit Insurance & COVID-19

Exporters and sellers in every industry are feeling the effects of COVID-19, and they will look to their trade credit insurance to cover amounts that their buyers no longer can pay.  It has been only ten weeks since the first US resident was reported to be infected with novel coronavirus COVID-19, and the virus has wreaked havoc on businesses in nearly every sector since then.

Trade credit insurance (sometimes called accounts receivable insurance) protects sellers against a buyer’s non-payment of debt, up to a certain percentage – typically 80 to 90 percent of the bill.  Most trade credit insurance policies include a “waiting period” after a bill is due before a policyholder can make a claim, and 180 days is typical. It is expected that the first wave of COVID-19 trade credit claims will arrive by early summer and continue throughout the year. The anticipated surge in trade credit claims will likely be met with forceful efforts by insurance companies to get out of paying claims.

PUTTING TRADE CREDIT CLAIMS IN CONTEXT

Economists predict that the country’s GDP will shrink by 34% in the second quarter of 2020. One of the largest trade credit insurance companies estimates that in a typical market, 1 in 10 invoices go unpaid. Even less than a year ago, an industry association counting the world’s largest trade credit insurance companies among its members (ICISA) reported an 8% increase in amounts covered by insurance, coupled with a 1.5% increase in claims paid.  In other words, more accounts were being insured, leading to more claims for insurance companies to pay.  This increase in paid claims, ICISA noted, occurred “despite favorable economic conditions.”

Economic conditions have certainly taken an unfavorable turn since then.

With a worldwide pandemic that has brought the global economy to a nearly grinding halt, sellers in every industry will be unable to pay bills as they come due. Trade credit policyholders will be making more claims – and they will be making those claims to insurance companies whose investment accounts are suddenly worth much less than they were three months ago.

Insurance companies selling property and liability insurance have already staked out their positions on why policies supposedly will not cover COVID-19 losses. There is good reason to believe their trade credit counterparts will respond similarly.

BE PREPARED FOR INSURANCE COMPANY CHALLENGES TO YOUR CLAIM

Trade credit policies generally promise to indemnify a buyer for a specified percentage of unpaid amounts that become due and payable during the policy period. Trade credit insurance is intended to protect a seller from non-payment caused by many things, including a buyer’s default, insolvency, or inability to pay because of catastrophe or acts of God.  Policyholders will have strong arguments that buyers who default on payments because of COVID-19 impacts are amounts that the trade credit policy promises to pay.

But policyholders should be wary of insurance company efforts to break those promises. The following are some expected challenges based on concepts addressed in many trade credit insurance policies.

Non-disclosure

Trade credit insurers often raise the defense of “non-disclosure” to avoid paying claims.  The argument goes that if the insurance company had known about some fact or another, it would not have sold you the policy it did.  In some jurisdictions, insurance companies can void policies altogether if they successfully prove that a representation or omission in the application process was “material,” meaning it caused the insurance company to take a position it would not have taken otherwise.

In the COVID-19 context, policyholders should expect challenges to what they knew about the creditworthiness of the buyer at the time of contracting.  Insurance companies may blame a buyer’s failure to pay on facts about the buyer that are unrelated to coronavirus, arguing that the policyholder failed to disclose things about the buyer that would have changed the insurance picture.  Some insurance companies analyze and investigate a buyer’s creditworthiness before underwriting the risk.  In those cases, an insurance company will have a harder time using non-disclosure to avoid its obligations.

But in response to any non-disclosure challenges, policyholders will want to look to the insurance company’s prior conduct in similar circumstances. Had they insured contracts involving the same seller before? Has the newly “material” information been asked of the seller before? While it is fact-intensive and likely time-consuming to establish, an insurance company’s previous conduct or silence can go a long way toward discrediting a non-disclosure argument.

Prior Knowledge

Depending on the specific policy period and payment dates, trade credit insurance companies may attempt to raise a “prior knowledge” defense to get out of paying a trade credit claim.  Insurance covers risks that are unforeseen at the time the contract is made. Insurance companies will likely seize on the evolving nature of the coronavirus pandemic to argue that sellers had “prior knowledge of facts or conditions” that would alert them to a buyer’s nonpayment.

Any response to the argument that a seller was aware that COVID-19 would impact the buyer’s ability to pay will need to take into account the dates of key pandemic events, both global and local. The dates of COVID-19 actions in the buyer’s home state or country will also likely be at play. As with a response to a “non-disclosure” defense, combatting a “prior knowledge” defense is highly fact-specific.

Policyholders may find that the “reasonable expectations” doctrine of insurance interpretation aids them in this scenario. In many jurisdictions, insurance policies must be interpreted to give effect to the reasonable expectations of the average policyholder. It is fair to say that most policyholders reasonably expect their insurance policies to respond to the losses following the sudden and unprecedented spread of COVID-19, whose impact was not appreciated at the time the policy was entered.

Challenges to the Underlying Sales Contract

While the defenses of non-disclosure and prior knowledge rely largely on what was said, done, or known during the application and underwriting process, policyholders should also anticipate challenges to the insured sales contract.

Trade credit insurance policies contain several provisions that limit insurance company obligations if the underlying sales contract is not compliant with the insurance policy.  Successful challenges to the validity of the contract – such as that it was never properly executed or that the transaction at issue was not covered by the insured contract – may jeopardize coverage. Some policies specifically exclude coverage if there is any “express or implied agreement . . . to excuse nonpayment.”

To avoid or rebut a challenge about the sales contract itself, trade credit policyholders should take special care to follow and apply the payment terms and credit control provisions in the contract. While there is no policy exclusion for being a conscientious seller, be prudent in your communications with buyers about your payment expectations.

Like so much about the legal impact of COVID-19, coverage for trade credit insurance claims stemming from COVID-19 losses will be fact-specific and potentially hard-fought. Trade credit policyholders should give prompt notice of their claim, document their losses, and prepare to respond to any insurance company challenges with the assistance of their broker or trusted insurance expert.

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Vivian Costandy Michael is an attorney in the New York office of Anderson Kil P.C. and a member of the firm’s Insurance Recovery Group. Through jury trials, summary judgment, mediation, and settlements, Vivian has helped to recover millions of dollars in insurance assets under liability and property insurance policies sold to corporate policyholders