Credit risk insurance offers local businesses just the safety net they need when supply chains are getting stretched. Image Credit: Bloomberg

Corporate reliance on trade credit insurance is broadening as an alternative to business financing. Along with that, there is a change in perception about it as being a cost that companies are forced to incur.

Often referred as trade or export credit insurance, it is a risk management product offered by insurance companies to protect a company’s account receivables from losses due to risks such as a default, insolvency or bankruptcy. Insured companies are covered if the customer fails to pay for purchased goods or services. The coverage can also include a component of political risk, which is offered to insure the risk of non-payment by foreign buyers due to currency fluctuation risks, political unrest, expropriation, etc.

While credit insurance has traditionally been used by exporters, in the era of COVID-19, even domestically domiciled companies can benefit from its protection. Without credit insurance, enhanced vulnerability and uncertainty over the creditworthiness of customers could result in a business decision to forgo sales, or a decision to implement punitive credit policies that could damage long- term relationships.

Such coverage is instrumental in widening the scope for businesses, by making it easier to engage in cross-border transactions, diminish the chances of non-payment, and as adequate cover for receivables against defaults.

Go easy on claims

But the short- and medium-term negative effects of COVID-19 on businesses will translate into significant claim hikes under the coverage, and which will push insurers towards uncertainty and even compel them to terminate the offered coverage. To mitigate this risk, the governments should provide backstops for credit insurance to eschew potential losses and ringfence the industry to remain afloat.

By doing this, they will facilitate businesses not only to survive the crisis, but will prevent supply chains from seizing up.

Etihad Credit Insurance, the UAE’s federal export credit company, in conjunction with Dubai Islamic Economy Development Centre is providing Sharia-compliant structures enabling UAE businesses to remain competitive and fostering export opportunities to newer markets.

However, it is all up to the insurance industry on how favourable they are in responding to unfamiliar and untested business dynamics. They will need to accept their roles in bolstering much required trade credit coverages in an unforeseen business landscape we have today

- Abdul Moiz Khan is CEO and Managing Partner of Fursa Consulting.