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3 June 2020
Trade credit insurance has always played a vital role in building confidence in the global, regional and national economies. With the new economic outlook driven by Covid-19, however, there are significant challenges that insurers are working hard to overcome for New Zealand businesses. The key ones are outlined below.
Many countries once thought to be solid economies have been quickly downgraded to ‘At Risk’, ‘Unstable’ and ‘Extreme’. With dwindling or uncertain government aid packages in many countries, there is a foreseeable knock on effect to businesses.
Insurers are increasingly needing to assess customers’ financial statements (where they previously may have relied on trading history or credit reports to underwrite coverage). These assessments are conducted by the insurer’s credit risk analysts often in the customers’ country and in their language. However, most insurers’ credit risk analysts have bottlenecks of workload for their customer assessments caused by disruption to their operations in countries hard hit by Covid-19 as well as significant demand for cover. Therefore, there are sometimes delays on obtaining insurance coverage. This can be challenging if there are imminent sales/orders pending.
Customers in certain countries are increasingly likely to have ‘buyer’s remorse’ where they have ordered a large shipment of goods but can no longer afford to pay or they can pay but do not have confidence they can sell on the goods themselves. This can lead to commercial disputes that are often not covered by export trade credit insurance. However, they can lead to claims at a later date should the dispute be resolved and the customer default on the payment. This adds a long tail of risk for trade credit insurers to factor in.
Communication with customers in certain countries is increasingly difficult. Depending on the labour laws of the country, it is often unclear whether the customer has laid off all their staff or furloughed them. Previously trade credit insurers were able to track down and verify this information through their staff or representatives in the customer’s country. Covid-19 disruption creates significant challenges to identify what is actually happening on the ground.
Increasing demand for longer payment terms as overseas customers look to pass on the credit risk down the supply chain to the exporter. This increases exposure for the New Zealand exporter as a higher amount of debt is outstanding and the export credit insurers have to factor in higher credit limits. At a time when insurer’s ability to provide cover is reducing, there is reduced availability for these higher limits.
Any product destined for a tourism hot spot is under additional scrutiny from insurers and, to a lesser extent, general consumption through the hospitality industry, e.g. food and luxury goods destined to cruise ships.
If you don’t have a policy and are researching options:
If you have an established policy already:
We hope you find the information above helpful. If you have any questions or if you would like to speak to us regarding trade credit insurance for export and local businesses please talk to your broker.