Brexit's impact on credit limits
Let me start right off with a disclaimer of sorts: it is too early to see the actual impact of the Brexit reflected in the economic figures. While the contraction of the UK economy in 2020 was 9.9%, that was largely caused by the impact of the Covid-19 pandemic. How much impact did the impending Brexit have? That remains guesswork, even for the absolute experts.
In the coming years, it will remain difficult to formulate a concrete answer to that question. There was already a six-month transition period for the entry into force of import rules and border controls, for example. Because of the pandemic, this has been temporarily suspended until the second half of the year 2022. The impact of Brexit will therefore only become fully visible once the virus is under control, coronagraph measures are phased out and thus more (trade) traffic is restored. The longer transition period also gives companies (and governments) longer to gradually adjust to the new situation. For instance, they can ensure proper documentation or find alternative sales channels, such as Eastern European countries. So it remains to be seen to what extent the changed trade relations with the EU will hinder a quick recovery.
In practice, credit insurers have also had some time to prepare for the effects of the Brexit. They have used that time by identifying early which companies are expected to be most affected and intensifying contacts with them. Examples include companies active in vegetable, fruit, meat, fishing and transport exports, with a significant share of sales coming from the UK. Although insurers are cautious about extending coverage on the high dependency companies, for the time being, the better disclosure allows them to maintain coverage policies as much as possible. Of course, in the course of 2021/2022, it should become clear whether this initial assessment is correct or whether they still need to adjust coverage policy. The latter will largely coincide with the final impact of Covid-19.
The impact of Covid-19 on credit limits
The Covid-19 pandemic had a substantial impact not only on the course of the Brexit, but also on the global economy. Yet, in terms of credit insurance, the impact actually stands in stark contrast to the impact of the financial crisis in 2008/2009 (and to a lesser extent 2011/2012). Although a number of sectors, including hospitality, retail and the travel industry, were hit hard, government support measures mitigated the impact considerably.
First of all, the guarantee of over 12 billion from the Dutch Street has allowed credit insurers to maintain existing credit limits as much as possible. Without this state guarantee, the negative outlook would have caused coverage policies to be adjusted, resulting in limit reductions. Besides preventing this acute intervention, the guarantee also enabled insurers to be accommodating for longer delayed payments. This through a temporary adjustment of policy conditions in terms of collection notices.
In addition, the business support measures have ensured that a sharp rise in bankruptcies has been avoided, thus also preventing a flood of debt collection and claims reports. But so much for the good news... The current expectation is that this is only a delayed effect. Once the support measures are phased out, it seems inevitable that there will still be a flood of collection and claims reports. Active risk assessment is also still taking place in the background. And insurers are already anticipating the expiry of support measures by obtaining early information on how companies will fare after 2020.
Domino effect: need for higher limits
Moreover, maintaining coverage is only part of the solution. With perspective slowly gaining ground, several markets are already anticipating the end of the lockdown. This is already causing an increase in commodity prices of wood and metal, for instance. This automatically creates increased limit requirements for upstream companies. This is undoubtedly going to act as a kind of domino effect as the economy gets further underway.
As a result, insurers are increasingly going to face higher limit requirements. While the information needed to assess this - the 2020 annual figures - is actually expected to be lower for most companies. So within the credit insurance market, we face a significant challenge. The distinction between good and bad risks needs to be made even better. So that insured demand can be met on companies that fall into the good category. It should be in everyone's interest - the insured suppliers and their buyers, but also the insurers themselves - to offer more coverage on these very companies to meet the increased limit demand.
Want to know more about options for hedging Brexit and Covid-19 risks? At Xolv, we like to think with you to arrive at a tailor-made solution.
