Support measure in the context of Covid-19: the State temporarily reinsures short-term trade credits
On 21 April the government concluded a memorandum of understanding with Credendo ECA, Assuralia and private credit insurers on a programme for the reinsurance of short-term trade credit by the Belgian State. The memorandum of understanding, set up with the assistance of the National Bank of Belgium, supports Belgian businesses facing economic problems due to the Covid-19 pandemic.
In the context of the Covid-19 outbreak and in order to counteract its harmful impact on the economy and trade, a memorandum of understanding concerning a programme for the reinsurance of short-term trade credit (less than two years) by the Belgian State for the benefit of private short-term trade credit insurers was signed on 21 April 2020 between the Minister of Finance, the Minister of Economic Affairs, the Minister of Security and the Interior, responsible for foreign trade, Credendo – Export Credit Agency, Assuralia, and the credit insurers Atradius, Coface, Credendo – Short-Term Non-EU Risks, Credendo – Excess & Surety and Euler Hermes. This agreement was negotiated under the auspices of the National Bank of Belgium.
Credit insurance for trade receivables between firms is a vital link in trade between Belgian businesses. Firms often grant payment terms of 30, 60, 90 or 180 days. If the buyer defaults, the credit insurer pays the supplier compensation which may equal up to 85/95 % of the invoiced amount. Credit insurers therefore play a crucial role in providing working capital for firms.
Owing to the economic disruption caused by the Covid-19 pandemic, credit insurers expect many debtors to encounter payment problems in the coming months, which considerably increases the risk of having to pay compensation. Consequently, credit insurers feel obliged to lower the credit limits for many debtors in order to safeguard their own solvency. Furthermore, it is difficult to assess the solvency of firms in the current economic context.
In order to ensure that credit insurers maintain credit lines at an adequate level, credit insurers today agreed a simple State-aid system with the federal government. The National Bank of Belgium, the supervisory authority for the insurance sector in Belgium, helped to facilitate the negotiations on this memorandum of understanding.
Under the memorandum of understanding, the government offers a reinsurance programme to insurance policyholders domiciled in Belgium and insured with a credit insurance institution operating in this country. The reinsurance programme is being implemented between Credendo – Export Credit Agency – and the sector. The aim is to avoid unnecessary suspension of the existing credit limits covered by the reinsurance programme. Credit insurers will undertake to maintain intact as far as possible, until the end of 2020, the credit limits actually applied during the twelve months preceding 1 March 2020.
In return for this commitment, Credendo – Export Credit Agency, acting for the State, agrees to reinsure the risks underwritten by the said credit insurers established in Belgium. The reinsurance programme provides for the insurers to continue to cover a substantial part of the compensation, with that percentage varying according to the claims ratio. The reinsurance programme also provides for the progressive sharing of premiums between the insurer and Credendo, again depending on the claims ratio.
A reporting system will be set up to monitor the credit insurers’ commitment. It will entail a monthly report on changes to existing credit limits. Obviously, the confidentiality of the commercial data is guaranteed. If the State so requires, the credit insurer will have to provide a brief explanation of the basis on which it took a decision, so as to demonstrate that its action is not arbitrary.
The memorandum of understanding was concluded subject to the approval of the European Commission.
The conclusion and implementation of this agreement address the concerns of the business world. Credendo – Export Credit Agency, acting on behalf of the State, and all private credit insurers signing the memorandum of understanding therefore undertake to conclude a bilateral reinsurance contract as soon as possible.