Trade credit – insurance and risk issues from COVID-19

The current situation is unprecedented and almost all countries around the world have been affected by the COVID 19 crisis. Most governments have taken action and many countries are in lock-down. This will have a significant impact on Global trade. Some experts believe the impact could be even more dramatic than during the 2008/9 global financial crisis.

Trade Credit Insurance (TCI) is an effective financial risk management tool that safeguards a company against losses sustained from non-payment of trade related debts. TCI is available to all registered businesses that sell goods and services or credit terms, this includes businesses that trade domestically and internationally.

If a buyer does not pay (often due to bankruptcy or insolvency) or pays very late, the trade credit insurance policy will pay out a percentage of the outstanding debt. Accounts receivables typically represent more than 40% of a company’s assets, trade credit insurance can prevent bankruptcies, help companies manage credit, and even present opportunities for business expansion in the increasingly connected global marketplace. The primary function of trade credit insurance is to protect sellers against buyers that do not or cannot pay.

The policy is triggered if a buyer does not pay, the trade credit insurance policy will pay out a percentage of the outstanding debt. This percentage usually ranges from 75% to 95% of the invoice amount, but may be higher or lower depending on the type of cover that was purchased.

Trade credit insurance policies are flexible and allow the policyholder to cover the entire portfolio or just the key accounts against corporate insolvency, bankruptcy and bad debts. The most common type of cover is so-called Whole Turnover Cover, which covers all buyers of the policyholder.

Already insurers have started dealing with the fallout from COVID-19 and are making amendments to their portfolios, QBE has halted trade credit protection for high-risk policies under a certain limit and made changes at higher levels in response to the coronavirus pandemic. QBE will not provide trade credit cover in high-risk areas for policy limits under $US250,000 ($406,300), has reduced cover by 25% across the board in the $US250,000 ($406,300) to $US1 million ($1.6 million) limits range, and above that level in high-risk categories it has reduced limits by 50%. Any existing coverage for goods or services already committed will be unaffected, with the changes applying to business going forward.