A Strong Recovery Requires a Healthy Trade Credit Insurance Industry

In a new study, outside consultant Robert Litan and economist Yong Xu, both financial industry experts, find that because of the sharp increase in economic uncertainty due to the COVID-19-induced recession, U.S.-based trade credit insurers – who cover the risk that suppliers and other companies may not be paid by their buyers – already have cut back their coverage by almost 14 percent since year-end 2019.

The authors project that the insurers could make additional cuts as infection rates spike throughout the country and if the much anticipated “second wave” of the virus comes this fall.

Trade credit insurance (TCI) is of critical importance to the smooth operation of supply chains, since without it, many suppliers, especially smaller to medium sized companies, would be reluctant to expand their sales to manufacturers or retailers.

With less TCI coverage, insured companies will be less able to meet rising demands for their goods and services from their buyers – manufacturers and retailers — as consumer demand picks up. The authors estimate that, conservatively, the TCI coverage cutbacks will inhibit $46 billion in additional production and the creation of approximately 155,000 jobs among supplier firms in the absence of a government response. These are lower bound estimates of the economy-wide impact for multiple reasons, but most importantly, because they do not include inhibited output and job creation in downstream manufacturing and retail industries.

The adverse impacts estimated by the authors can be avoided, however, if the U.S. government were, for a temporary period, to share in some manner with the TCI industry the non-payment risk of TCI customers, 60 percent of which have revenues of $20 million of less.

The authors discuss the features and advantages of a temporary government reinsurance program proposed by the three largest private TCI insurers in the U.S. for doing this, funded in part by market-determined reinsurance premiums paid to the federal government. Such a program draws on best practices from similar approaches that have already been adopted or are under consideration in other G-7 countries.