Trade credit and surety reinsurance

Trade credit and surety reinsurance carries the risk of insurers specialized in two lines. Trade credit insurance, described in its direct form in the dedicated entry, indemnifies a supplier left unpaid by a customer that has become insolvent. Surety guarantees performance of a contractual obligation. Underwriters dread one feature of this market: its loss experience is strongly procyclical. Losses stay low during growth, then explode abruptly when the economy turns. Reinsurers then pull capacity exactly when direct insurers need it most, and the squeeze on trade credit between businesses gets worse. In spring 2020, at the start of the Covid-19 pandemic, a wave of insolvencies was expected. The fear was that the market's major trade credit insurers, Euler Hermes (renamed Allianz Trade in 2022), Atradius and Coface, would sharply cut their cover limits. The economy would then lose trade credit capacity judged essential to keeping supply chains running. In June 2020, the UK government announced a temporary public reinsurance scheme of up to ten billion pounds sterling. It backstopped trade credit insurers operating in the UK so they would keep their cover limits to businesses instead of cutting them. Several other European states adopted similar schemes that same year, Germany as early as April.