Last Thursday we argued the credit insurance industry is a vital cog of global trade which governments ought to consider backstopping.
Our point was, at times of economic and financial stress, trade credit insurers have a habit of withdrawing cover, essentially depriving companies of liquidity when cash flow is already under pressure. In such circumstances, liquidity problems can become solvency ones, hastening the need for action.
The Association of British Insurers, the body representing the industry in the UK, has written to the Treasury and the Department for Business, Energy and Industrial Strategy, calling on them to offer reinsurer of last resort support for the industry. Other European countries have announced similar measures in recent weeks.
On Friday, Alphaville received word one of the world’s biggest trade credit insurers, Euler Hermes, had written to brokers in the UK saying that they would carry out plans to withdraw cover should the UK not follow the lead of Germany, France and Belgium — which unveiled its package of support last week — and provide credit insurers with a backstop. Here are some excerpts from the letter (our emphasis here and throughout):
The outbreak of the Covid-19 pandemic continues to affect the majority of countries across the globe, and in turn is having a significant detrimental impact on the worldwide economy. Our current forecasts, based on 2 month confinement and progressive removal of confinement, are global GDP for 2020 at -3.3% and at least a 20 to 25% global increase in insolvencies with GDP set to fall to -8.2% in the UK . . .
. . . As the situation continues to unfold, the new measures taken all across the world by local governments will imply, for most companies, a temporary but significant decrease in turnover or production capacity, or both. Certain sectors (eg airlines, travel, automotive, hospitality, construction) are more impacted than the others (eg food delivery, medical supplies). However, there is no doubt that many companies across all sectors and markets are experiencing significant cash flow and liquidity pressures in the immediate term, with many likely to face even more severe problems in the longer term without the ability to recommence trading to any defined timescale.
In view of these unprecedented events, Euler Hermes will be reviewing our credit limit decisions in certain areas in order to take into account the impact of the reduced volumes currently, and to reassess our position on the more vulnerable credit risks to protect our clients from a significantly increased risk of bad debt . . .
. . . Lastly, I would like to highlight that Euler Hermes is currently in discussions with Government (HMT/BEIS) about the protection scheme for cover on buyers in all industries. If these discussions are successful, we may be able to significantly reduce the amount of cover being affected. However, if the protection scheme is not agreed — we will have to carry out the actions as outlined above which is currently the base case scenario. Therefore, we very much appreciate you [sic] co-operation in working together through this challenging time.
Euler Hermes confirmed that the firm had sent the letter. It told us:
The current crisis brings with it a significant increase in late payments and additional risks that our clients may face unpaid invoices. Euler Hermes’ objective — aligned with its clients – is to create a protective shield against these risks. We continue to assess market risk in real time and remain committed to providing clients with the support to trade with confidence. Credit risk is by nature dynamic and levels of risk vary according to circumstances. Due to the current crisis, certain buyers may present heightened levels of risk of non-payment and deteriorated credit worthiness. As a response, Euler Hermes may adapt the risk ratings of these buyers and reduce the credit limits available to clients accordingly. This always applies only to future trade transactions and is primarily aimed at steering clients away from imminent and predictable risk of non-payment.
We’ve heard the discussions with the UK government are going well, and are focused more on the design of the package rather than whether support is needed. But they’ll need to act sooner rather than later if they do not want other credit insurers to follow suit.