The pandemic has demonstrated that a wide toolkit of measures is available to governments in the midst of a crisis. Given the nature of the pandemic and the early uncertainty about how it would affect the real economy, it is understandable that a broad approach was required. Businesses were able to access a range of direct grants and loans, as well as furlough schemes, tax deferrals, and in some instances, deferrals of insolvency itself.
Of course, this sort of belts and braces approach was not seen everywhere around the world with many countries struggling to respond quickly to Covid-19. However, there are indications that the weight of government interventions overall had some positive effects in other economies too. By putting money directly into the hands of businesses in one country, demand was maintained to some extent, including in cross-border trade. This may have resulted in somewhat of a dampening effect in other countries too, or at least provided an important source of income when local markets were struggling. Recovery will be difficult for many countries, with related effects on supply chains and possible volatility in commodity markets an emerging risk.
From a credit insurance perspective, specific measures were put in place early in the pandemic in several markets, including Germany, France and Spain within the EU, and Canada and the UK outside. These state-backed reinsurance arrangements sought to absorb the risk of increasing credit insurance claims as liquidity and non-payment risk in different sectors were expected to deteriorate. This was done in return for a portion of premium from private insurers, as well as their commitment to avoid cutting limits as a means of reducing exposure. In this sense, the credit insurance schemes provided a short-term psychological boost to the sector.
At ICISA, we recently took a look at what would have happened without these schemes. In a comparison between markets where schemes existed and those where they did not, it is clear that wider support measures had similar effects in each. Reductions in insolvencies and lower claims volumes were common across many markets as a result. Elsewhere, it is also clear that some businesses took the opportunity to wind-down in an orderly fashion during the pandemic, without impairment to debtors. So, even thought the psychological benefit of credit insurance schemes was valued, the stability brought to the economy through wider state support likely had a greater effect over time, including in credit insurance markets.
The overall picture in many advanced credit insurance markets is one where insolvencies and resulting claims arising from defaults have remained low throughout the pandemic as a result of state intervention. But the same trend in insolvencies is seen in markets with credit insurance schemes as in those without. Indications from market participants during 2020 and early 2021 show that insurers’ appetite and capacity for providing cover recovered throughout the year and was at or near pre-pandemic levels by the end of the year.
When we looked at conditions in different markets during 2020 and beyond, we can see that while cuts to limits were sharper in markets without credit insurance schemes, this was likely softened by protections given to the real economy. For example, while 2020 was the worst year for insolvencies in the US since 2010, insolvency rates declined month-by-month from July to the end of the year, and overall, insolvencies were down by an estimated 5% on 2019 levels, according to research by Atradius.
Of course, there are different dynamics in each market and a crisis such as Covid-19 will impact each economy differently. Those with a heavy focus on tourism and hospitality will have suffered worse than others due to lockdowns and travel restrictions. From a credit insurance perspective too, how mature and competitive a market is, whether limits are cancellable or not, and other factors will also be influential in what actions credit insurers would have taken with our without state reinsurance arrangements. However, the overall trend of capacity and appetite returning in either scenario suggests that wider state support measures would have given insurers sufficient comfort for reductions in cover to have been less sharp than in other crises.
Within the EU, government interventions were delivered under a temporary framework introduced to allow for greater flexibility in state aid rules. Credit insurance schemes formed part of this framework. Most of these closed at the end of June 2021 without further renewal as markets were capable of returning to a more normal footing. Indeed, a proposal for a new scheme at that time in a market that had not brought one in earlier was ultimately rejected as unnecessary on the basis of the readiness of the local industry there.
In a related move, the EU’s competition arm, DG COMP, also introduced a temporary decision on removing all countries from the list of “marketable risk” countries. This decision was taken on the assumption that there was no private market available for short term cover for certain export-credit risks and therefore open to public bodies to provide cover. The decision was initially time-limited until 31 December 2020, but was subsequently extended until mid-2021 and later to the end of 2021.
It seems unlikely that there was no private market available in “marketable risk” countries to warrant continued extensions of this decision, particularly as greater stability came to markets through the effects of wider state support. DG COMP is at the time of writing considering whether to extend this decision further. ICISA has pointed out that the ending of credit insurance schemes at the end of June 2021 and feedback from our members on market conditions, suggest allowing markets to return to a normal footing would be far more beneficial at this time.
The experience of these different measures – both those directly related to credit insurance and those focused on supporting the real economy – shows that governments have a range of tools available to them in a crisis. However, this experience has also shown us that there are limitations and drawbacks to their use. The blanket approach adopted by many governments clearly kept businesses afloat at a time of great uncertainty, but the extent to which it preserved “zombie businesses” remains unclear. Similarly, looking at the ESRB’s estimates of what portion of EU state support has ultimately been utilised, it seems likely that a more targeted approach could have the same effect on limiting negative effects in the real economy.
We also saw that credit insurance schemes can have a significant positive effect early on by allowing insurers to maintain their positions. However, their interaction with wider state support measures aimed at limiting insolvencies means they can lose their benefit over time. Similarly, continued extension of time-limited measures (such as the decision on marketable risks) can lead to unnecessary distortions in private/public competition, or in other ways prevent markets from resuming normal functioning as quickly as possible.
What steps governments take next will be crucial for how the recovery looks. As state support to the real economy ends, we may see an uptick in insolvencies as a result. However, while economies need to resume normal functioning to fully recover, “soft-landings” may be beneficial in some areas and a cautious and coordinated approach will be needed.
Looking to future crises, we have learned that government interventions can keep many businesses viable during an extended crisis. However, we have also learned that targeted approaches could have the same effect as broader blanket approaches. Which approach is best will depend on the quality of information available to governments. Similarly, reinforcing the use of time-limits on different measures may provide greater clarity to those involved or benefiting from them. A cautious bias towards ending such measures on the specified date unless circumstances dictate otherwise may be preferable to continuous extensions. This is particularly true where market conditions indicate a return to normality is both beneficial and warranted.