The cessation of business as usual resulting from the effects of Coronavirus has shattered confidence in normal business relationships and triggered a recession. Credit insurance can help fill this confidence gap. Credit insurance protects an insured company’s accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy. Insured companies are covered if a customer fails to pay for purchased goods or services.
Credit Insurance in Europe vs. USA
While many companies in Europe view credit insurance as an indispensable tool, most U.S. companies are not familiar with this product. According to expert Gary Mendell of Meridian Finance Group, there are several reasons why credit insurance is not more widely used in the United States, including:
▪ Business insurance in general is as widely accepted as business financing in Europe, whereas insurance is often perceived by U.S. companies as a cost they’re forced to incur rather than as a business tool that can help them expand and grow.
▪ European banking regulations provide openings for credit insurance to afford financial institutions capital relief whereas this is not (yet) the case in the USA.
▪ The sizes and proximity of different countries in Europe—vs the larger U.S. landmass and economy—mean a bigger proportion of European sales are cross-border transactions, compounding commercial nonpayment risks with country/political risks and giving rise to more demand to cover receivables against defaults.
Credit insurance has historically been used by exporters, but in the era of COVID-19, even domestically focused companies can benefit from its protection. Without credit insurance, increased uncertainty over the credit worthiness of customers could result in a business’ decision to forgo sales or to implement punitive credit policies that could damage long- term relationships.
Credit Insurance and Government Backstops during COVID 19
While credit insurance looks increasingly useful, the surge of claims and uncertainty about the short and medium-term economic effects of COVID 19 have compelled carriers to terminate coverage. Realizing that credit insurance can mitigate economic damage brought on by COVID-19, many European governments including Germany, France, the Netherlands and Belgium, as well as Canada, have decided to provide backstops for credit insurance. This enables insurers to continue to provide coverage for long-term clients and opens the door to new “insureds.” This allows businesses to continue to operate on credit, thus preventing supply chains from seizing up. Waldemar Mozes from Cedar Street Asset Management explains, “The backstop for credit insurers is designed to ‘flatten the curve’ of defaults along supply chains that could result without credit insurance. If governments did not provide this backstop, business operators would likely proceed with more caution and potentially lose market share.”
Moving Forward
In a highly competitive business environment fraught with elevated risks associated with COVID-19, backstops to credit insurance potentially alter the competitive dynamic for companies operating globally. As of early June, the U.S. government has not supplied a backstop to private credit insurance carriers. The absence of a local government backstop potentially puts American firms at a competitive disadvantage to their industry counterparts in Europe, Canada and elsewhere.
In the absence of a synchronized international solution, governments around the world have stepped up support for their domestic businesses with varying, but substantial, credit insurance support to keep these domestic companies operating at a higher level than would otherwise be possible. While increasing costs to the taxpayer, the price of these programs must be viewed in the context of the lost jobs and opportunities if the programs were not in place. Given the historical context in which credit insurance has been used, it is possible that this competitive situation is not well understood by U.S. companies and policymakers.