Credit insurance companies: small and medium-sized businesses rated as ticking time bombs

This, however, appears to be the flaw in the system as the pandemic has triggered an unprecedent global economic crises. Although insurerance companies certainly have to prepare for times when protective shields are no longer available, this begs the question of what use subsidies have for companies if business is restricted or does not come about at all if insurance is not provided. More bluntly speaking, a trading company needs to be able trade to get back on its feet. The situation is a similar one to turning up the tap on the bath but pulling the plug at the same time and then wondering where the water is going to. Assessment criteria should have, in other words, been better adjusted to help more companies survive.

The AUDITOR has interviewed four leading international credit insurance companies in Germany on their experience in the coronavirus pandemic and on their expectations for the future. The interview partners are:

• Antje Wolters, press officer at Euler Hermes
• Dr Thomas Langen, Senior Regional Director for Germany, Central and Eastern Europe at Atradius
• Jochen Böhm, Underwriting Director Northern Europe at Coface
• Bernd O. Engelien, Head of Corporate Communications / Public Affairs at Zurich Group Germany
• Kathrin Janosch, press officer at German Insurance Association (GDV)

Have the criteria for credit insurance cover changed? What special criteria currently apply to ensure that a company remains insured?

Thomas Langen from Atradius assures clients:

With our bad debt protection, we enable our clients to continue doing profitable business. At the same time, we fulfil our function as a risk navigator by providing early warning if a transaction involves too much uncertainty and a default is likely. Our risk assessment basically follows the same criteria as before the pandemic. We assess a customer's risk of non-payment individually based on current financial figures and other data, such as the long-term competitiveness of a business model. In addition, we also include [German] federal reinsurance in every credit limit decision. In this way we provide vital support for our customers even in the current crisis.

Zurich Group Germany states that although the same criteria apply as before the crisis, the creditworthiness and risk-bearing ability must be sufficient "and fit our risk appetite". The insurance company scrutinises risk developments more closely. In view of the crisis a closer look is, for instance, taken at business prospects and supplier and customer relationships.

Euler Hermes responds that risk evaluation criteria have remained unchanged and that individual assessments are based on financial ratios and other factors such as market position, diversification and sales markets, management, customer segmentation and strategy and unique selling points:

We evaluate these individually for each company. If individual parameters change (i.e. due to the Covid-19 pandemic), this can lead to a change in the credit rating and risk assessment for some companies. This does not, however, necessarily have to be the case. It is part of the day-to-day business of a credit insurance company to adjust commitments - upwards and downwards.

Jochen Böhm from Coface also confirms that "basically the same [criteria] as always" are applied. Coface ultimately assumes risks for clients (underwriting limits) that are based on the creditworthiness of companies (clients’ customers). These risks are higher in the current crisis. "This means that we are currently contacting thousands of companies to obtain the most up-to-date information as possible. This is because last year’s balance sheet is only of limited value in many cases," according to Böhm. "We calculate limits on the basis of this information. We do not make blanket exclusions or reductions. Communication between the policyholder, the buyer and the credit insurance company is important in this context", Böhm explains.

He adds that due to Germany’s protective shield, agreed by the federal government and the insurance companies in April, credit insurance companies:

… are able to continue to underwrite limits to an extent that current risk assessment would otherwise not allow. The objective of calming the credit insurance market has been achieved. Without the umbrella, insurance companies would have been forced to protect their balance sheets and possibly lower limits to a large extent or refuse cover altogether. Companies insured are thus able to concentrate on their business, which in many cases was or still is severely impacted by the coronavirus. The concerted action of the federal government and the credit insurance companies has certainly helped to stabilise business relations. Cuts or exclusions are still possible even at this point, if the risk-increasing circumstances are not coronavirus-related and not subject to the protective shield.

Have you already noticed that defaults or delays in payment are increasing, or are these mainly expectations prompted by the current situation?

"So far, we are only seeing a nominal increase in defaults or delays as compared to last year," the Zurich Group states, "but we expect more significant effects related to the crisis later this year or next year.” Developments are heavily dependent on the pandemic and the measures taken by governments to fight the virus and curb the economic impact.

"Protective measures against the coronavirus have directly affected the business activities of all companies," as Langen from Atradius observes:

The subsequently adopted measures to stabilise the economy may still be mitigating the economic slump and the insolvency figures. Nevertheless, the uncertainties in domestic and international business are already greater than they have been for decades, not least because the rescue packages are also keeping several companies alive that would not be able to survive in the market under normal conditions.

The further development of payment defaults and delays in national and international trade will depend on how the pandemic develops over the next few weeks, which protective measures need to be introduced and how long rescue packages will remain in force. If stabilisation measures, such as the federal guarantee [in Germany], are not extended, we expect a sharp increase in bankruptcies at the beginning of next year at the latest.

Böhm from Coface totally agrees with this:

Yes, clearly. There are more late payments. In addition, there is a noticeable increase in the number of applications for an extension of initially agreed payment periods or for deferrals and instalment payments. This is another reason why communication between business partners is important. Especially since our economists are currently observing a trend among suppliers to agree to no or shorter payment terms. Two recent Coface studies confirm this in Germany and the Netherlands.

Yet, it remains to be seen how insolvencies will develop. In Germany, for instance, the obligation to register is partially suspended. This does not make risk assessment any easier for Coface. "We have to reckon with a significant increase in insolvency figures next year. Not only in Germany, but also in important sales markets," Böhm warns.

How many companies are currently not insured at all or not comprehensively?

The Zurich Group confirms that “for a number of companies in our existing portfolio, the limits have been reduced". But adds that “this is often at the request of the policyholder, as reduced economic activity means that less capacity is needed”.

Can a local trend be identified here?

In Germany, the industries which are particularly affected by the protective measures against the coronavirus are represented in all parts of the country. "In this respect, there is no federal state where the coronavirus has an above-average impact on the economy," as Langen from Atradius explains.

Internationally speaking, it can be stated that the gross domestic product (GDP) has declined most in countries that have adopted particularly strict protective measures for an above-average period of time. These countries are, consequently, producing much fewer products and the use of services is more restricted. Atradius confirms that Italy, France and Spain rank among the countries that are worst-hit by the long and deep cuts caused by the pandemic. Tourism is also an issue:

Countries in which tourism makes a major contribution to economic performance are also particularly affected. This again includes several southern European countries such as Spain, Italy and France and Portugal. Several companies depending on domestic and international visitors suffered sales collapses as soon as travel restrictions came into force.

The economic outlook for the US is, by contrast, more encouraging than for most countries in Europe. "One reason for this," says Langen, "is that the US government's protective measures have restricted the economic activities of American companies to a lesser extent than the measures taken by most EU countries." China is the only leading national economy that will not experience a recession. As Langen explains, the country “also suffered considerably from the effects of the coronavirus in the first quarter, but the economy picked up again in the second quarter and grew by 3.2% over the same quarter last year”.

Which sectors are particularly hard-hit? What about the food processing industry?

According to the Zurich Group, the impact on the food processing industry as not quite as bad as in other sectors. Yet, “the individual company situation must be considered. Companies that are specifically affected by production losses due to protective measures (i.e. quarantine) tend to be more at risk, depending on duration and impact”.

Langen from Atradius agrees that “[t]he business model of the food processing industry is basically intact. Food is also eaten in times of the coronavirus pandemic. We do not see payment at increased risk in the industry due to the events of the last months." A rise in uncertainty is rather to be observed in conducting business with companies from the travel, tourism and leisure industry, i.e. those sectors directly affected by travel restrictions. These also include cruise ship operators, shipyards and airports. Event and trade fair organisers are also confronted with payments being more at risk. On top of this, retailers run a higher risk unless they sell essential goods or have online sales channels.

Coface also highlights continuing problems in steel trade, mechanical engineering and the automotive industry. "These sectors are closely interlinked, there always are interactions", as Böhm explains. Construction is, by contrast, doing well and no major adverse impacts have been observed in the food sector. According to Böhm, "the industry has also benefited from the lockdown or was not so badly affected, except for the catering industry."

What developments will take place in 2021?

"Atradius reckons that the number of insolvencies will rise sharply due the economic crisis and that there will be more corporate bankruptcies in several countries than during the Great Recession prompted by the global financial crisis in 2008/2009," as Langen reports. He reckons with an enormous backlash in bankruptcies: 

With France, Switzerland, Belgium, Spain, Portugal and Norway, several of Germany's major international trading partners also rank among the economies that could see record numbers of corporate bankruptcies in 2020 and 2021. As soon as the temporary suspension of the obligation to report insolvencies expires, it is very likely that company bankruptcies will rise sharply in these countries next year.

Coface emphasises that it is important to wait and see how bankruptcies develop. "These will be bumpy quarters," says Böhm. How companies that survive the crisis will deal with structural changes that are evident in many sectors will also be an issue. Böhm, in addition, voices his sympathy for companies that have been put in a difficult situation:

The coronavirus is not the cause of change everywhere but has accelerated developments in many cases. For companies facing difficulties through no fault of their own, whose figures and prospects were good, but which have now been hit with full force the situation is tragic.

The travel sector with its various sub-sectors, such as air traffic, is one case in point. Unemployment is also expected to rise as reduced working hours by no means provide a long-term solution.

Will the current criteria remain valid for the time being or can we expect adjustments in the foreseeable future?

"The assessment criteria and underwriting policy will depend on the further course of the crisis and its impact. This is associated with a high degree of uncertainty, which is why we cannot make any reliable forecasts in this regard,” as the Zurich Group explains.

Langen emphasises that Atradius will continue to adhere to the company’s established underwriting strategy in the coronavirus crisis:

We continue to assess all clients individually based on the current key financial figures. In doing so, we include the guarantee commitment of the German government in our decisions, which enables us to maintain or underwrite credit limits for customers which started off as healthy companies but have got into trouble due to the coronavirus. Should the situation of a customer nevertheless develop in such a way that a limit must be reduced, we will inform the supplier concerned at an early stage and work out solutions together with him. Atradius will not carry out a blanket lifting of credit limits for a group of customers up to a certain turnover volume or for a certain industry. Should Germany’s federal guarantee expire, we will review and individually evaluate the credit insurance cover for each buyer.

Government representatives and insurance companies are currently discussing a possible extension of Germany’s protective coronavirus shield for commercial credits beyond 31 December. The German Insurance Association is, however, of the opinion that it is impossible to assess the advantages and disadvantages of such an extension:

The credit insurance companies regularly exchange information with the federal government on the joint rescue package. Whether an extension of the programme beyond the currently agreed end of the contract is necessary and sensible cannot at present be reliably assessed from the point of view of the credit insurance companies.

The AUDITOR thanks all interview partners.