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Law360, London (May 26, 2020, 3:52 PM BST) -- The European Commission has signed off on plans by the Netherlands to guarantee trade credit insurance to offer protection against a wave of company insolvencies as COVID-19 lockdowns begin to ease.
The commission said Monday that the proposals, drawn up to encourage insurers to continue offering trade credit insurance, were in line with European Union competition law and could go ahead. The proposals call for the state to share the risk of offering coverage with the insurers up to €1 billion ($1.1 billion).
The proposals would see the state effectively acting as a reinsurer for the trade credit sector.Insurers would commit in return to continuing to offer cover "in spite of the economic difficulties faced by companies due to the coronavirus outbreak," the commission said.
"The Dutch guarantee scheme will help ensure that trade credit insurance remains available to all companies to secure their commercial exchanges," Margrethe Vestager, the executive vice-president in charge of competition policy for the commission, said. "This will protect their liquidity needs and help them continue their activities in these difficult times."
European authorities fear that the prospect of widespread insolvencies will deter insurers from offering trade credit insurance, which offers cover to companies supplying goods and services against non-payment by a partner or client. Under EU state aid law, government plans to support private industry require review by the commission to ensure that subsidies will not disrupt competition within the bloc.
Without trade credit insurance, buyers are often required to pay in advance, creating widespread liquidity problems across the market and often leading to insolvencies.
It would therefore "remedy a serious disturbance to the Dutch economy" if trade credit insurance continues to be made available to companies, the commission added.
Governments in Denmark, Belgium, Germany, France and the U.K. have launched guarantee schemes for trade credit insurance, taking on a portion of the risk for claims in a similar manner to reinsurance.
Investment bank UBS said at the end of April that global losses from trade credit insurance could reach $16 billion, with government backstops limiting further losses. That would make it the second worst-hit sector, behind business interruption, with potential losses there of $22 billion.
But Morgan Stanley has put the potential losses much higher, saying that global trade credit insurance losses could balloon to $46 billion over the next two years as a result of the pandemic.
--Editing by Ed Harris.
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