COVID-19 disrupts Trade Credit Insurance

COVID-19 continues to disrupt world trade with the World Trade Organisation expecting global trade to fall by 9.2% this year.

Nowhere has this disruption been felt more than in Trade Credit Insurance. In the US, many companies in certain industries are seeing their insurance coverage being severely curtailed.

According to a report in The Wall Street Journal, insurers are becoming increasingly hesitant to write credit policies involving metals like aluminium and nickel due to problems in the industries that purchase them.

Therefore, many US suppliers such as Imperial Zinc have struggled to sell much of their Aluminium stocks, meaning that many of their products will be ruined. It’s “an incredibly difficult predicament” said Jay Sandler, President of Imperial Zinc speaking to the WSJ. “Credit Insurance is an extremely important tool for our business”.

About $600 billion in US sales were covered by Credit Insurance in 2019 and it is vital for many suppliers who, due to tight profit margins, cannot afford to have a key customer defaulting. So, without coverage, many suppliers will not be able to shift their products, causing serious financial damage to their business.

This hesitancy among insurers is due to a downturn in Aluminium with the COVID-19 pandemic creating a glut in Aluminum supply, with benchmark prices falling by 12% this year - down to $1,589 a metric ton on the London Metal Exchange.

Emphasising the connectivity of world markets, the slump in Aluminium has also impacted the automotive and aerospace industries, both of which have taken a significant hit from the pandemic with declining sales.

This comes as part of a broader re-alignment I which (re)insurers are targeting industries such as retail and travel that are susceptible to “footfall” and consumer demand, with higher premiums and reduced limits of cover.

Yet, by restricting certain areas of trade credit insurance, insurers are in danger of ignoring the interconnected nature of events and that a restriction in one area of business activity can negatively impact another area of activity.

Further Reading Suggestions

The interconnectivity of trade risk poses a challenge for modellers

Post Date: 21/10/2020

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