The credit insurance business, which was doing well, having recovered from the financial crisis of 2008, is also experiencing the first consequences of the economic recession caused by the outbreak of COVID-19. According to forecasts published by some international organisations, the issues will not be limited to isolated cases or a single sector and they have already warned of the impact that the pandemic could have on the global economy. For example, the International Monetary Fund (IMF) predicts that global GDP will shrink by 3% in 2020, while Spain will see a decline of 8%.

In the insurance sector, Lloyd’s CEO John Neal expects the sector will incur losses of over €50,000 million, more than the cost of natural disasters such as Hurricane Katrina or the 9/11 attacks.

All this suggests that many companies’ exposure to credit risk will increase sharply due to the health crisis. Those that depend on the continuous renewal of their credit facilities will be seriously threatened, especially those that are more vulnerable and have a limited financial capacity, making it difficult for them to meet their payment commitments.

Credit policies will, nevertheless, continue to operate protecting individuals and entities against debtor insolvency by guaranteeing they will collect amounts owed. Their business-to-business credit operations will be covered, offsetting potential bad debts.

Before and after

Although for the moment credit insurance is coping with the new circumstances, it is bound to be substantially affected by higher claims. It is important to remember that these are specific operations that allow insurers to reduce their exposure by re-evaluating companies and realigning underwriting operations. For this reason, the liquidity that government bodies and financial institutions can provide will play a key role.

Despite these contributions, if there is no reinsurance company underwriting the operation, direct insurers will not have the capacity to pay out, leaving many companies in a difficult position. The market is also likely to become tougher: insurers will continue to provide credit solutions to customers, but at a higher cost. We will also see insurance companies reducing their exposures and performing a more detailed and accurate analysis of risk.

At the same time, if the market is convinced claims rates or insolvencies will increase, businesses will need to rethink their strategy. We are undoubtedly looking at a before and an after in terms of new insurance solutions.

This new scenario will also have a visible impact on the demand side. It will reduce companies’ capacity and exposure, but it is also important to note that businesses and customers will show greater interest in these products, which they had not previously considered contracting. This will result in more credit protection, as there will be more policies, with opportunities to gain market share, as potential customers will now be more aware of the importance of credit insurance than before.

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