More governments are expected to join those already offering support to their trade credit insurance markets amid the coronavirus pandemic.

Trade credit insurers are grateful for the support, but with a range of different approaches, consistency across countries could be a challenge for multinational companies that rely on trade credit cover.

Trade credit insurance protects companies who sell goods and services on credit against the risk of not being paid by buyers if these customers hit financial difficulty. Insolvencies are on the rise because of the coronavirus crisis, and there is a risk of more.

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Credit insurers' typical approach is to reduce or cancel coverage for trading with buyers that show signs of being unable to pay to protect both themselves and their clients. But with the coronavirus crisis and its economic effects pushing even healthy companies into financial trouble, there is a risk of widespread withdrawal of trade credit cover.

State support

Action is being taken to prevent this. For exports in particular, the European Commission removed all countries from its list of "marketable risk" countries for short-term export credit insurance. The move paved the way for government export credit agencies, or ECAs, to insure short-term risks in those countries, normally the preserve of the private insurance market.

Several governments have now stepped in to support trade credit insurance more broadly. On May 13, the U.K. government announced that it would temporarily guarantee transactions covered by trade credit insurance through a reinsurance agreement, "ensuring the majority of insurance coverage will be maintained across the market."

Tim Fisher, managing director of trade credit at broker Arthur J. Gallagher, said in a statement that "we had already seen signs that insurer risk appetite was significantly reduced; however, we believe this reinsurance guarantee will assist in enabling them to offer greater support to U.K. businesses and begin to reverse that trend."

The EC has approved trade credit reinsurance schemes in France and Germany. On April 7, the Dutch government announced plans to introduce measures to support the continuation of trade credit cover in response to the coronavirus pandemic. And a memorandum of understanding was signed in Belgium on April 22 for Belgian ECA Credendo to reinsure private trade credit insurers on behalf of the government.

More countries are exploring trade credit schemes. Rob Nijhout, executive director of the International Credit Insurance and Surety Association, or ICISA, said via email that the association was aware of eight European and three non-European countries where there are ongoing talks between insurers and governments about trade credit support. In an interview he said he would expect more.

Fabrice Desnos, head of northern Europe at Allianz Group-owned trade credit insurer Euler Hermes Group SA, said in an interview that he would not be surprised if "a significant part of the EU" implemented schemes and they could be expected to be "quite widespread." He added: "Given the current situation, I think it's good to create this type of private-public partnership to support the economy going through a trough that is unprecedented."

Call for consistency

A potential problem is that the EC has left it up to individual countries to decide how they implement trade credit support schemes, if at all. As a result, there are a variety of coverage amounts and structures.

Although varying approaches can be an administrative burden for trade credit insurers, Nijhout said a bigger concern is that they create inconsistencies for insurers' multinational clients. Policyholders in countries with a scheme will benefit, while those based in countries without could lose out. Nijhout said "there is a potential for arbitrage between systems" without a level playing field.

Desnos said companies in countries with no foreseeable government intervention would be "at a relative competitive disadvantage" to those whose governments were offering support. He added: "We would have welcomed a more European-wide response, but it is clearly not happening."

Desnos also said, however, that "our clients will welcome any form of support. We are taking what governments are prepared to offer."

Manuel Arrive, a director in the insurance group at Fitch Ratings, said the government support is "a positive" for the credit insurance industry. He added: "Global trade credit insurance is going through one of the most severe crises in history so any help they can get from governments or from anyone is welcome."

Even if there are inconsistencies, Nijhout said simply agreeing broadly on using reinsurance-type structures would be "a huge win, because that allows for some sort of harmonization."

Lessons learned

A further positive is that governments and insurers seem to have learned from mistakes made in the 2008/09 financial crisis.

The big difference this time, according to Vinco David, secretary general of export credit and investment insurance association the Berne Union, is that "governments, ECAs and private insurers are responding much faster than 11 years ago." He said in an interview: "We all have learned from the previous crisis and a fast response is necessary, otherwise trade will be disrupted."