COVID-19: Trade and Credit Insurance Implications

Published on 18th March 2020

While analysts initially expected economic effects to be confined to Q1 2020, COVID-19 appears set to have a longer impact. In early March, the Organisation for Economic Co-operation and Development (OECD) warned that a long-lasting and intensive outbreak across Asia-Pacific, Europe, and North America could reduce global growth to 1.5% in 2020, from its pre-outbreak forecast of 2.9%. Even without such an outbreak, the OECD revised down global growth forecasts to 2.4% for 2020.

The COVID-19 pandemic and efforts to contain its spread are disrupting economic activity. With strong implications for the trade credit, political risk, and surety insurance markets, it appears that many of the world’s largest economies will be affected, presenting risks to global trade and business operations.

This disruption to production will drive lower revenues, corresponding to lower margins with profit levels across the automotive, textile and chemicals sectors likely to be the hardest hit initially. Airlines, transport and travel operators are also likely to experience demand-side challenges, as global and domestic travel slows.

Insureds should be able to make a valid claim for losses related to COVID-19 under a trade credit policy, if there are no violations of stipulated clauses. As the proximate cause of the loss is default or non-payment the coverage does not consider the underlying cause of the loss, if it is not excluded.

For those with businesses interests in severely affected locations, there are a range of recommendations. These include:

• Actively monitor the situation
• Adopt a careful approach to exporting into the location and review any contracts in place
• Be prepared for requests from insurers for specific information on any funds outstanding on goods or services sold to risks based in that location, along with instructions to refrain from shipping, if ports begin to reach capacity.
• Make a determination, prior to a potentially insurable shipment being made, as to whether conditions on the ground would be so impactful that they are shipping into a foreseeable loss, and if they are exercising due care and diligence.

Taking these steps and business continuity risk mitigation actions will help your organisation be more resilient to COVID-19’s economic effects, especially if it continues to spread to other countries.

Although potentially covered by a trade credit policy, communicable diseases such as COVID-19 can be difficult to model or predict. However, for any company that sells on open account and/or has assets overseas, such coverage forms part of a broader, proactive risk management strategy.

For more information, please contact your usual Mash JLT Specialty representative.