The Need For Credit Insurance in the Aftermath of a Pandemic

May 12, 2020

The Need For Credit Insurance in the Aftermath of a Pandemic

As the world faces the consequences of the Covid -19 pandemic, one thing is for sure, businesses will have to face reduced demand cash flow issues due to credit squeeze and supply chain disruptions.

As the world faces the unprecedented consequences of the Covid -19 pandemic, one thing is for sure, businesses big or small will have to face reduced demand (atleast in the short term), cash flow issues due to credit squeeze and supply chain disruptions. Added to these, reduction in price of oil will have implications for the Gulf region.

The current concern of governments around the world is to save lives due to which a lockdown has been implemented in most of the countries. As and when the curve flattens, the lockdown will be slowly removed and economic activity would revive. At this point, one of the key challenges that businesses would face is liquidity. Most businesses would seek trade credit from their suppliers and this is going to play an important role in further business growth. However, most suppliers would be wary to provide any extended credit lines and might look at further reducing the limit.

It is in this context trade credit insurance can be helpful. A credit insurer would underwrite trade receivables of the insured and compensate in the event of a default of payment by the buyer. The products available in the UAE market generally cover the following risks:

Credit risks associated with export of goods	Credit risks associated with local sales
Protracted Default of payment	Protracted Default of payment
Buyer’s insolvency/bankruptcy,	Buyer’s insolvency/bankruptcy,
Commercial risks	Commercial risks
Payment moratorium
Payment defaults due to war, civil disorder, natural disasters.

Credit insurance leads to increased access to finance through banks as the latter is more secured where there is trade credit insurance for the receivables.
Overall, credit insurance policy brings in a control mechanism of the trade receivables and reduces the bad debt provision resulting in a healthier balance sheet.
Credit insurers have a huge database of companies with information relating to their financial health which is updated regularly. This data can provide real time information to customers on the credit worthiness of their buyers. This would allow the insured to seek new markets, customers and grow their business.