Managing credit risk in the prevailing COVID-19 pandemic environment is critical and should form part of a business continuity plan, as businesses move to manage cash flow and apply for government aid packages (subject to eligibility).
Credit insurance policies protect the policy holder(s) from non-payment by customers due to defined insured events or perils. This typically covers insolvency and protracted default events. Some policies also cover defined political risks.
Claims volume is expected to increase following lockdown and government enforced Movement Control Orders. These global restrictions have resulted in a significant impact to normal trading conditions, leading to
- supply chain disruption, including default by end buyers of goods and services
- restricted access to lending facilities and capital markets
- requests for deferred payments, adjusted payment terms and repayment plans
- contracting customer demand.
With global insolvencies projected to reach 2008 proportions, trade credit markets will be challenged by the prevailing economic turbulence. Therefore maintaining regular contact with suppliers and customers is important.
Reviewing insurance cover
We strongly recommend an early review of your insurance cover is undertaken, with particular focus on
- reviewing your trade credit insurance policy wording, including policy exclusions. Contact your Gallagher trade credit specialist with any questions or concerns
- understanding what triggers a trade credit insurance claim and notifications that must be provided to the insurer to comply with the policy wording, including the required notification timelines
- working closely with your customers (debtors) to understand cash flow or trading concerns early that may trigger a notification and/or create a delay or default. Contact your Gallagher account manager should anything noteworthy come up in those discussions. If in doubt, err on the side of caution.
It is an important condition of the policy that the insurer is notified of any adverse information as and when you are made aware of it. Adverse information includes anything that could give rise to a potential claim against the policy.
There are two events where the insurer must be notified, including, but not limited to
Maximum extension period (MEP) breaches
The maximum extension period (or MEP) is defined as the point at which the insurer needs to be notified that an overdue account could result in a claim. The present circumstances heighten the chance of late payments.
Most trade credit policies include an MEP provision in the policy wording which specifies how many days from the original due date a business has to work with the buyer to secure payment, without notification to the insurer.
It is important to be aware that once the MEP has been breached, businesses must place the account on ‘stop’. Any goods or services provided post MEP breach will not be covered under the trade credit insurance policy.
As an MEP breach is deemed a ‘notifiable event’, the insurer must be notified immediately, providing the current debtor position and details relating to non-payment. Your Gallagher trade credit specialist can provide guidance on the reporting process.
Proposed Repayment Schedule
Where a debtor requests a formal repayment plan, it is important that you seek insurer approval prior to accepting the proposal, particularly where the rescheduled payment dates will see a breach in the MEP.
If a customer falls into protracted default or becomes insolvent, you will be indemnified for the cost of goods and services you have delivered within the scope of the trade credit insurance policy. When speaking with customers look out for signs that cash flow may be challenged and advise your Gallagher trade credit specialist if insolvency or payment default looks to be a likely outcome.
Below is an example of a material fact an insurer would expect to be notified of.
"There is an outstanding $100K invoice. While it is not overdue, the buyer has stated that they are unable to pay the invoice as a result of cash flow issues."
If you are unsure as to whether an event is deemed reportable, we recommend that you contact your Gallagher trade credit specialist for advice.
Credit limit reductions
COVID-19 related trading challenges have led to major limit reductions by the credit insurers across client portfolios. While insurers generally believe they are helping clients to navigate a more challenging commercial environment, we have seen a number of cases where there has been insufficient discussion with clients regarding the specific impacts of COVID-19 to their business.
Through a coordinated approach, Gallagher is working with credit insurers to help them better understand which of our clients' customers require limit support to continue trading in these unprecedented times.
We are here to help
Gallagher has a dedicated team of trade credit specialists who are well positioned to provide advice on all aspects of trade credit insurance. Please contact our team should you wish to discuss any aspect of your current trade credit program, including where a notifiable event may be applicable.
Racheal Tumelty, National Head of Trade Credit, Surety & Political Risks Surety CR & PR
Michelle Prete, Client Manager Surety CR & PR
Janelle McDade, Client Manager Surety CR & PR
Michael Woodward, National Practice Leader Surety CR & PR
Paul Morgan, Client Manager Surety CR & PR
Vic / SA / Tas
Enzo Amato, Account Manager Surety CR & PR
Paul Morgan, Client Manager Surety CR & PR