Coronavirus: Trade credit insurance sector may see rise in claims

Non-life insurers are keeping a close watch on the evolving coronavirus situation and if economic activity remains subdued amid major disruptions in the supply chain, they may see a spurt in claims arising from the trade credit insurance segment.

The spread of coronavirus and the subsequent lockdown has disrupted the supply chain which may lead to a situation where buyers fail to pay their dues to manufactures or make delayed payments.

Trade credit insurance covers a supplier of goods and services against the risk of non-payment by its customers because of wilful default or insolvency. The repaying capability of the customer depends on various macroeconomic and microeconomic factors. Claims in trade credit insurance mirror the economy —higher claims point to a liquidity crunch in the economy.

“Credit insurance policies allow sufficient flexibility to policyholders to extend due dates on their trade receivables. Consequently, there has not been any significant uptick in claims under this segment, so far," said Sanjay Datta, chief-underwriting, claims & reinsurance, ICICI Lombard General Insurance.

“However, if economic activity were to remain significantly subdued with major disruptions in the supply chain, coupled with the lack of consumer demand, an increase in claims incidence is possible," he added.

So far, there has not been a noticeable impact of the current pandemic situation on trade credit insurance.

Shreeraj Deshpande, chief operating officer, Future Generali India Insurance, said: "Insurers are keeping a close watch on the situation and are ready to support and help the insured in case of an adverse situation”.

Trade credit insurance responds once a default is officially declared. This is normally done after the end of the extended credit period offered by the creditor, as well as only when all means of recovery have failed. This time period is normally in excess of 180–270 days from the date of extending credit,  Deshpande said.

Industries like IT distribution and consumer electronics are major subscribers to the credit insurance policy and with lack of demand on account of the current disruption, these sectors will be impacted adversely, which may result in elevated stress among players. This may eventually lead to a hike in claims under trade credit insurance policies.  

This segment was already struggling with a rise in claims because of the economic slowdown. Liquidity challenges, slower growth rate, a southward trend in the top line, and profitability resulted in increased defaults by buyers to their suppliers.

In FY19, claims in the credit insurance segment were to the tune of Rs 373 crore, as against Rs 269.57 crore in FY18. On the contrary, premiums collected saw a 14 per cent rise at Rs 670 crore, compared to Rs 586.11 crore in FY18. According to the latest data available, in the April-February FY20, premiums collected by non-life insurers saw a 5 per cent contraction at Rs 1,294 crore over the same period a year ago.