The COVID-19 crisis has created an insolvency time bomb which is set to spark a series of insolvencies in 2021, particularly as stimulus measures introduced by governments around the world wear off.
Speaking to Asia Insurance Review, Marsh trade credit leader Tyler Wendleken said, “A leading trade credit insurer has forecasted that insolvencies would increase by 41% in North America, 22% in Europe and 29% in Asia Pacific in 2021.
“I’d say now is the best time to get trade credit insurance as we would see rates increasing a lot from the second quarter this year and capacity would also be capped as trade credit insurers look to manage their exposures.”
He added that some sectors may find it more expensive to secure trade credit insurance given their heightened credit risk at the moment, such as automotive, retail (non-food), airline, hospitality and the solar industry.
“Pricing has increased in these areas since April and prior to that it had been a soft market for the last nine years. Looking at where we are now, it is unlikely to return to a soft market for at least the next 12 months,” said Mr Wendleken.
Growing awareness in Asia
Asia is still massively under-penetrated when it comes to trade credit insurance, with penetration levels of approximately 1% in major Asian markets compared to about 45% penetration in places like the UK, Germany and France.
“Some people in Asia may feel that they have traded with their counterparty for so long that they are comfortable, while some may opt for other arrangements like factoring. But people are often surprised to know that trade credit insurance is more cost efficient compared to factoring, simply because they have assumed that prices for trade credit coverage to be at a certain level,” said Mr Wendleken.
Trade credit insurance does not only allow a company to extend more open credit to customers, but they could also benefit from better credit terms – in an increased risk environment – as banks view trade credit insurance as collateral. M