Slowdown woes: Trade credit insurance claims rise 38%, premiums jump 14%

The insurers feel that various initiatives taken by the government such as recapitalisation of PSBs and their mergers will boost the liquidity situation in the market

Slowdown in the economy has adversely impacted the trade credit insurance segment of general insurers. 

This is because claims in this segment have seen a 38 per cent year-on-year rise in FY19 while the premium growth was only 14 per cent during the same period.

Trade credit insurance covers a seller against the risk of non-payment by its customers arising due to wilful default or insolvency. The repaying capability of the customer depends on various macro and micro economic factors.

“During the last few quarters, we have witnessed a spurt in claims, primarily due to stress in terms of liquidity in certain segments,” said Subrata Mondal, Executive Vice-President, IFFCO Tokio General Insurance.

Subramanyam  Brahmajosyula, Head – Underwriting and Reinsurance, SBI General Insurances – said, “Claims in trade credit insurance mirror the economy and higher claims experience point to liquidity crunch in the economy.”

“In times of economic distress, such defaults are likely to rise and hence increase loss ratio of trade credit insurance,” he added.

In FY19, claims in the credit insurance segment were to the tune of Rs 373 crore compared to Rs 269.57 crore in FY18. On the contrary, the premiums collected saw a 14 per cent rise at Rs 670 crore compared to Rs 586.11 crore in FY18.

“Liquidity challenges, lower growth rate, southward trend in top line and profitability resulted in increased defaults by buyers to their suppliers,” said Gautam Murkunde, Vice-President, Global Insurance Brokers.

While the claims have gone up, the insurers say regulatory hurdles have hampered growth in this segment. Among the various hurdles that insurers face, disallowing banks to buy a policy is a major impediment. Moreover, disallowing to cover bill discounting, channel financing and factoring is also an obstacle.

“In recent times, various stakeholders from the industry have approached insurance regulator the Insurance Regulatory Development Authority of India (Irdai) for widening the scope of the product,” said Mondal. “The regulator has taken cognizance of the same and constituted a working group to deliberate on a time-based manner,” he added.

Recently, the Irdai decided to review its three-year old guidelines on trade credit insurance in line with the changing requirements of the market. 

It has set up a nine-member working group headed by New India Assurance chairman and managing director Atul Sahai to review the March 2016 guidelines.

According to the terms of reference given to the panel, it would also suggest suitable amendments to guidelines that add value to the policyholders and stakeholders such as banks and factoring companies.

The insurers feel that various initiatives taken by the central government like recapitalisation of public sector banks and their mergers will boost the liquidity situation in the market.

“We are hopeful that the government’s initiatives will improve the current liquidity crisis and eventually lead fewer defaults in the market,” Mondal added.