'Preventing unnecessary damage'
The state guarantee for credit insurance was finally approved by the European Commission at the end of May. To the delight of Xolv, as we share the state secretary's view that credit insurers as lubricant of the economy play an "indispensable role". The fact that the State acted as reinsurer of supplier credits prevented credit insurers from withdrawing limits en masse. 'It is plausible that because of this government intervention and the calmness it brought to the market unnecessary economic damage is prevented'' Vijlbrief wrote to the House of Representatives. The state secretary drew that conclusion partly on the basis of extensive reports that the major credit insurers submit monthly to the Ministry of Finance.
200 billion
In the parliamentary letter - which you can download in full here - quotes the State Secretary as saying that on an annual basis in the Netherlands with short-term supplier credits by commercial credit insurers, more than 200 billion euros in trade made possible. After the outbreak of the corona crisis, this trade on instalments threatened to come to a halt partly because insurers could no longer properly assess the risks and thus had to scale down. Until the government intervened.
Domino effect
A situation where less was insured could have led to major economic damage if - as Vijlbrief describes - "the stoppage of trade and a wave of bankruptcies". This is because many suppliers logically do not want to deliver without insurance. If they did, they could have fallen over themselves; the famous domino effect where, for instance, a catering business falls down first and then the various suppliers. So to prevent this, the state decided to temporarily guarantee credit insurance; albeit up to 90 per cent.
Double-edged sword
Vijlbrief describes maintaining supplier credits as a "double-edged sword". 'On the one hand, the customers of the insured companies - ranging from small corner flower shops to large supermarket chains - continue to use installment delivery. This is certainly an important form of credit for the smallest businesses. On the other hand, the insured companies themselves maintain their sales as much as possible by allowing their customers to continue using this credit. Moreover, insured companies can in turn apply to their banks for the obtaining the necessary working capital because outstanding invoices are insured.'
Sustained support in ongoing crisis
Because the guarantee ensures calm and stability in the market - through September 2020, bankruptcies and thus damages were significantly lower than in previous years - an extension is needed to avoid uncertainty among companies and additional economic damage, according to Vijlbrief. The new provisional end date is thus 30 June 2021. Vijlbrief does not rule out that the scheme renewed once more becomes or that there is a different kind of support package comes if the crisis continues. As long as the risk of mass bankruptcies hangs over the market, government intervention in the supplier credit market is simply necessary.
'No more intervention than necessary'
Looking cautiously ahead to more favourable times, the expectation is that credit insurers - as soon as it is again feasible - will take back the insurance themselves. This is because reinsurance in its current form by definition financially loss-making is for insurers. Reimbursement of operational costs is currently the only source of income. Moreover, in addition to operational costs, insurers also bear part of the claims, as the State reimburses "only" 90 per cent. In addition, a ban on paying out dividends and bonuses is part of the reinsurance, which is also unfavourable to insurers.
Also read: our previous blog about 5 ways to pass the bank and the article Two for twelve for staffing industry: take out credit insurance now.
