Despite recent successes in combating the Covid-19 pandemic, most parts of the world are currently in a lockdown. The economic consequences are far-reaching. As a result, the credit insurer Euler Hermes expects a decline in the movement of goods and services of around 320 billion US dollars per quarter. No question about it, the world economy is facing a deep recession. The massive decline in travel activities is primarily affecting the aviation and tourism industries. The textile, leisure and automotive industries are particularly hard hit by the general decline in consumption. At the same time, many of the companies, especially in technology-heavy sectors, are having to cope with disruptions in their global supply chains. The result: Significant sales declines with ongoing fixed costs for employee salaries and office rents, for example, have a negative impact on the operating profit situation. The risk of bankruptcy is pervasive. Accordingly, credit insurers expect a noticeable increase in payment defaults. Therefore, some countries have established re-insurance schemes for the private credit insurance market, with the intention of increasing trust in the global supply chains. Nevertheless, most of these schemes will expire at the end of June 2021. The credit insurance market will definitely need to adapt underwritten exposure to the deteriorating risk environment:
Given these challenges, it is advisable for companies to proactively engage in a dialogue about credit risks and supervise their credit insurance policies and credit limits daily. Here are some advises:
Check and secure coverage:
Current insurance programs must withstand the requirements of the crisis. Quarterly sales forecasts per buyer should be used to convince credit insurers to provide enough credit limits. If you can prove that your credit limit requirements are related to really needed exposures, you will likely achieve higher acceptance ratios. However, many credit insured clients have requested more credit limit volume than the overall open accounts receivables in their balance sheet, which will support the argumentation of the credit insurer that many limits are not in line with real exposures.
Provide current information transparently:
Particularly under the difficult framework conditions, credit insurers are dependent on receiving timely information on company developments. This applies e.g. in the event of changes in future liquidity and the expected cash flow.
Document deadlines in advance in the event of a claim:
Payment defaults must be followed up and reported as is customary even in times of crisis. If credit insurers accept longer deadlines due to the crisis, it is advisable to record this in writing. Make sure that you you fulfill all obligations of your credit insurance policy and minimize the risk of humar error in the reporting of essential information to your provider on time.
Start early with the renewal of your current credit insurance programs:
Many companies wait to long with the renewal of their credit insurance policies. Though, even if your policy expires at the end of 2021, you should start the renewal process already in the first quarter. Especially if you see a decline of your acceptance ratios, a market tender is a good choice to see, if the given level of credit cover is really reflecting the market appetite.
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