Pressure builds on EU to harmonise and extend trade credit support during crisis

The European Union needs to do more to help the trade risk and asset origination market help companies survive and emerge from the Covid-19 crisis, leading representative groups have warned. The EC has adopted a temporary framework to facilitate extraordinary state aid during the crisis, which includes the removal of “marketable risk” countries and allows greater state-backing for short-term export credit insurance. Various EU states have used this to provide fresh support schemes to help maintain and boost trade credit cover on offer to insureds, as the private market pulls capacity in the face of fast-rising credit risk caused by the pandemic crisis. The Commission has stated, however, that such reinsurance support must be based on high-quality underwriting standards and adequate pricing to prevent the use of the support to gain unjustified advantage during the crisis. But various bodies have called on the EU to act further to include so-called single risk insurance and surety cover, lower the potentially high administrative burden involved and, importantly, avoid possible arbitrage opportunities within the currently unharmonised approach across Europe. In a recent statement, Robert Nijhout, insurance committee member of the International Trade and Forfaiting Association (ITFA) and executive director of the International Credit Insurance & Surety Association (ICISA), explained the need for further action. “In the last crisis, there was a perception that credit insurance refused to play along – that wasn’t the case then, and it isn’t the case in this crisis either. Like everyone else at the moment, we are driving in the dark without any headlights on. We don’t know what’s up ahead, but we too need some kind of assurance. The credit insurance industry is ready to join public efforts to combat the consequences of the Covid-19 crisis, by working together with governments to keep trade going,” he said. The ITFA, whcih represents the rights and interests of banks, financial institutions and service providers involved in trade risk and the asset origination and distribution market, pointed out that the European economy relies on a variety of insurance products – public and private, whole turnover and single risk. It said that all of these product areas need to taken into consideration, not just short-term export credit risks that are being boosted by state reinsurance provided to leading insurers such as Coface, Atradius, Euler Hermes and Credendo. “All of these products cater to specific market requirements – for example, single risk policies tend to cover large projects, while whole turnover mitigates risks related to short-term payment obligations. It is essential when setting up public support schemes, whether they be of regulatory nature (such as changes to existing regulation such as CRR/IFRS) or as subsidies (such as governmental counter-guarantees), that none of these products are neglected. Any disregard of these products would result in disadvantages to certain parts of the economy. Moreover, it is essential that a functioning insurance offering continues to be available once the immediate crisis is over. Businesses in Europe no longer provide solely for local or regional needs. Therefore, it is essential to harmonise such measures as much as possible throughout the European Union,” stated the ITFA. In a further statement, ITFA insurance committee member, Sébastien Heurteux, added: “The single-risk insurers bring great support to a variety of businesses financed by banks, including in some sectors and countries that are going to have challenges in managing the current crisis. So, it’s a question of missing an entire array of corporates and sectors that single-risk insurance covers.” Mr Heurteux said the government support schemes introduced to date have not taken into account the impact that such measures will have on the cooperation between public insurers, private insurers and banks, as insureds. The result is that there are now difficult questions around, for example, what happens to non-payment insurance solutions in instances where state aid schemes have stipulated that companies can defer payments on their bank loans during the crisis period, and where such delays could be considered a default of the payment obligation under the initial payment schedule, explained the ITFA. Another tricky area is where governments are providing sovereign guarantees to ensure that banks continue to lend to companies, and it is now not clear how private insurance works in parallel with a guarantee from the state, in the case of existing insured deals. “The mechanics of the state guarantees can have some challenges to implement on existing financing when insurance cover was already taken. State guarantees could conflict or overlap with existing cover. Could you end up losing cover because having one and the other doesn’t work on a legal basis, for example, or because having both overweighs the cost of cover?” asked Mr Heurteux. The ITFA also stated that where governments grant liquidity support measures to banks to lend to companies, the eligibility of insured assets for such schemes – as determined by each scheme’s parameters – could be called into question. They may limit banks’ ability to access to them, or create a level of intricacy that would require an adjustment of insurance policy wordings, it pointed out. “There could be a situation where banks would regret having insured assets, should the existence of the cover prevent banks from bringing the assets under those schemes that allow them to have access to liquidity, or from supporting corporates backed by state guarantees. These are just some of the questions for which there are no answers yet – the market is still working through the measures country by country, identifying what they imply,” stated the association. For these reasons, the ITFA and a number of other leading trade associations including the ICISA sent a letter to the EU asking for clarity and further action. “The letter welcomes the recent initiatives to reconsider the provisioning requirements for loans covered by ECAs, and asks that if serious consideration is given to allowing more flexible treatment of publicly guaranteed bank loans in respect of the non-performing exposures, that the private insurance market not be neglected in these deliberations,” explained the ITFA. “Elsewhere, in response to the multiplicity of state support schemes that have been introduced thus far, the ITFA is joining in industry calls – led by the International Credit Insurance & Surety Association – for a coordinated approach to Covid-19 support schemes across the European Union, which would assist both insurers and insureds in identifying what the various mechanisms are and what impact they may have on their business,” it added. The ICISA stressed the importance of harmonisation to avoid unnecessary cost and the potential for arbitrage. “Experience from previous crises, including the 2008 financial crisis, has shown that structuring such schemes as reinsurance arrangements where the state provides an essential backstop to private cover ensures minimal disruption to existing arrangements, while also avoiding any delays in providing short-term credit to the businesses that need it,” it stated. “Cross-border business is a cornerstone of the internal market of the European Union and will be essential to its successful recovery from this crisis. Firms ranging from large multinational firms to micro-enterprises are engaged in business between one or more member states. As a result, it is essential that approaches to support schemes within the European Union are closely coordinated and harmonised to avoid an unnecessary and costly administrative burden, and the possibility of arbitrage that differences in approaches across the EU may lead to,” added the ICISA.

Pressure builds on EU to harmonise and extend trade credit support during crisis

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