This arrangement benefits companies that were financially healthy before the pandemic but are experiencing problems due to Covid-19. So far, the arrangement has prevented chain reactions and bolstered confidence in the economic stability. “Credit insurers make an elementary contribution to overcoming this crisis und firmly stand by their customers in this difficult economic environment”, said Jörg Asmussen, Chairman of the Management Board at the German Insurance Association (GDV).
Scope and structure of bailout arrangement stay the same
Both the scope and the structure of the emergency alliance remain the same during this six-month extension: “The EUR 30 billion guarantee made by the federal government allows credit insurers to keep offering more than EUR 400 billion worth of credit lines to their clients even though risks have increased due to Covid-19”, said Asmussen. However, the emergency arrangement does not give companies carte blanche to enter into risky deals with customers whose financial stability had been questionable even before the Covid-19 pandemic. Insurers continue to monitor and assess buyers’ creditworthiness, assuming the essential task of risk assessment on behalf of their clients. In cases of particularly poor credit development credit limits may still be reduced or even cancelled.
Specifically, credit insurers pledge to keep offering their current credit limits as far as possible and to cover 10 percent of any sums paid under the bailout arrangement. Default risks above and beyond the guarantee made by the federal government will be borne by credit insurers. Also, credit insurers will pay almost 60 percent of their premium income in the first half of 2021 to the federal government. The agreement between the German government and credit insurers is subject to approval by the European Commission. On the insurers’ side it is Atradius, Coface, Credendo, Euler Hermes, R+V and Zurich who are members of the emergency alliance.
Commercial credit (del credere) insurance protects suppliers from the risk of a domestic or international buyer not being able or willing to pay a bill. In the event of debt default or longer-term payment delays, credit insurers will foot the bill. “We estimate that credit limits covered by insurers account for about 15 percent of German exports, thereby contributing significantly to the security of Germany’s export sector”, said Asmussen.