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3 June 2020

Trade credit insurance advice for New Zealand exporters

Trade credit insurance has always played a vital role in building confidence in the global, regional and national economies. With the new economic outlook driven by Covid-19, however, there are significant challenges that insurers are working hard to overcome for New Zealand businesses. The key ones are outlined below.

Global economic stability

Many countries once thought to be solid economies have been quickly downgraded to ‘At Risk’, ‘Unstable’ and ‘Extreme’. With dwindling or uncertain government aid packages in many countries, there is a foreseeable knock on effect to businesses.

Visibility of your customers’ creditworthiness

Insurers are increasingly needing to assess customers’ financial statements (where they previously may have relied on trading history or credit reports to underwrite coverage). These assessments are conducted by the insurer’s credit risk analysts often in the customers’ country and in their language. However, most insurers’ credit risk analysts have bottlenecks of workload for their customer assessments caused by disruption to their operations in countries hard hit by Covid-19 as well as significant demand for cover. Therefore, there are sometimes delays on obtaining insurance coverage. This can be challenging if there are imminent sales/orders pending.

Buyer’s remorse

Customers in certain countries are increasingly likely to have ‘buyer’s remorse’ where they have ordered a large shipment of goods but can no longer afford to pay or they can pay but do not have confidence they can sell on the goods themselves. This can lead to commercial disputes that are often not covered by export trade credit insurance. However, they can lead to claims at a later date should the dispute be resolved and the customer default on the payment. This adds a long tail of risk for trade credit insurers to factor in.

Communication challenges

Communication with customers in certain countries is increasingly difficult. Depending on the labour laws of the country, it is often unclear whether the customer has laid off all their staff or furloughed them. Previously trade credit insurers were able to track down and verify this information through their staff or representatives in the customer’s country. Covid-19 disruption creates significant challenges to identify what is actually happening on the ground.

Longer payment terms

Increasing demand for longer payment terms as overseas customers look to pass on the credit risk down the supply chain to the exporter. This increases exposure for the New Zealand exporter as a higher amount of debt is outstanding and the export credit insurers have to factor in higher credit limits. At a time when insurer’s ability to provide cover is reducing, there is reduced availability for these higher limits.

Tourism and hospitality industries

Any product destined for a tourism hot spot is under additional scrutiny from insurers and, to a lesser extent, general consumption through the hospitality industry, e.g. food and luxury goods destined to cruise ships.

How Crombie Lockwood can help

If you don’t have a policy and are researching options:

  • Speak with us in advance to understand potential issues or delays with placement. We can usually advise in advance indications on premium costs too.
  • Allow an appropriate timeline to investigate options. We can assist with a timeframe estimate for each application.
  • Ensure your credit limit assessment is conducted before the policy is in place. Insurers may provide a quote without yet indicating they can cover your customers to the extent you require.
  • Discuss with us whether you require longer trading terms than normal and whether these will be permanent so we can tailor the policy accordingly.
  • In most cases, consider including your whole ledger in an application. Insurers are less likely to cover your riskiest customer as they will prefer a spread of risk themselves. It can be sensible to look at options between ‘Single Risk’, ‘Selective’ and ‘Whole of Turnover’ policies in any case however as there may be negligible premium difference in each option.  
  • Speak with us about the type(s) of industries and countries you sell to. It may not be possible to cover certain countries or industries until trade credit insurers have changed their appetite.
  • Consider working with the New Zealand Export Credit Office (part of Treasury) for available options where the private insurers are not willing to provide coverage. Crombie Lockwood can help by facilitating this process.

If you have an established policy already:

  • Use the insurers’ online systems for credit limit updates, overdue notification and their live ratings of your customers and countries.
  • Work with us and the insurer on the ‘direct approaches’ in order of priority and trading requirements. Advise customers in advance that your credit insurer is conducting enquiries.
  • Plan internally to have potential delays to orders until the credit limit assessment is conducted. We can work with the insurers to propose timelines.
  • With the help of Crombie Lockwood, review your policy terms and conditions to ensure you are adequately covered e.g. Delayed-effect, Political Risk and Contract Repudiation extensions.
  • Consider working with the New Zealand Export Credit Office for “Top-up” coverage where the private insurers are not able to support the level of cover you need. Crombie Lockwood can help by facilitating this process. 
  • Approach renewals by ensuring careful consideration of your estimated insurable turnover. If it is difficult to estimate at this time, work with Crombie Lockwood and the trade credit insurer to allow greater premium adjustments should you not meet the targeted amount. 
  • Consider higher deductibles at renewal.

We hope you find the information above helpful. If you have any questions or if you would like to speak to us regarding trade credit insurance for export and local businesses please talk to your broker.

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