Trade credit insurance (TCI) is a policy that protects businesses from the risk of non-payment by their customers due to various reasons, such as insolvency, bankruptcy, default, or political events. TCI covers a percentage of the trade debt owed to the business, usually up to 95%. TCI can help businesses secure their cash flow, capital, and financing terms. TCI may also include political risk insurance, which covers the risk of non-payment by foreign customers due to currency issues, expropriation, or unrest.
The war in Ukraine is an ongoing international conflict between Russia, alongside Russian-backed separatists, and Ukraine, which began in February 2014 and which continues up to the time of writing (July, 2023). The war has resulted in more than 13,000 deaths, over 1.5 million displaced people, and severe damage to infrastructure and environment. The war has also disrupted trade and investment flows between Ukraine and Russia, as well as other countries involved in sanctions or counter-sanctions. According to the World Bank, Ukraine’s GDP contracted by 6.8% in 2014 and 9.8% in 2015 due to the war and its aftermath.
The war has a significant impact on the price of credit insurance for trade finance. The price of credit insurance reflects the level of risk associated with the trade transactions covered by the policy. The higher the risk, the higher the premium. The risk is determined by various factors, such as the country risk, the sector risk, the buyer risk, and the payment terms.
Country Risk
The Ukrainian war increases the country risk for both Ukraine and Russia, as well as other neighbouring countries that are affected by the conflict. Country risk refers to the likelihood of a country experiencing political or economic events that may impair its ability or willingness to honour its financial obligations. The war in Ukraine creates political instability, economic recession, currency devaluation, trade restrictions, and social unrest in the region. These factors increase the probability of default or delay in payment by Ukrainian or Russian customers or suppliers. As a result, the price of credit insurance for trade finance involving these countries rises accordingly.
Sector Risk
The occupation of parts of Ukraine also affects the sector risk for certain industries that are dependent on trade with Ukraine or Russia. Sector risk refers to the likelihood of a sector experiencing adverse events that may affect its performance or profitability. Some sectors that are particularly vulnerable to the war in Ukraine are agriculture, energy, metals, chemicals, and machinery. These sectors face supply chain disruptions, reduced demand, increased costs, and regulatory uncertainties due to the war. These factors increase the probability of non-payment or insolvency by businesses operating in these sectors. As a result, the price of credit insurance for trade finance involving these sectors increases as well.
Buyer Risk
The ongoing conflict in Ukraine also influences the buyer risk for specific customers or suppliers that are involved in trade with Ukraine or Russia. Buyer risk refers to the likelihood of a buyer failing to pay its trade debt due to its financial situation or behaviour. Some buyers that are more exposed to the war in Ukraine are state-owned enterprises (SOEs), small and medium-sized enterprises (SMEs), and exporters or importers with high concentration of trade with Ukraine or Russia. These buyers face liquidity problems, solvency issues; they are faced with the need to diversify their markets or sources. These buyers seek credit insurance to mitigate their exposure and enhance their creditworthiness.
Payment Terms
The recent conflict also affects the payment terms for trade finance transactions involving Ukraine or Russia. Payment terms refer to the duration and conditions of the trade debt repayment. Longer payment terms increase the risk of non-payment or default, as well as the financing costs for the seller. The war in Ukraine may force sellers to offer shorter payment terms or demand advance payments to reduce their risk, which may affect their competitiveness and profitability. Alternatively, sellers may use credit insurance to extend payment terms and offer more flexible conditions to their buyers.
In Summary
The war in Ukraine has had a significant impact on the price of credit insurance for trade finance, as it increases the risk of non-payment by customers or suppliers involved in trade with Ukraine or Russia, as well as other neighbouring countries affected by the conflict. The price of credit insurance reflects the level of risk associated with the trade transactions covered by the policy, which is determined by various factors, such as the country risk, the sector risk, the buyer risk, and the payment terms. The war in Ukraine increases the country risk for both Ukraine and Russia, as well as other neighbouring countries; affects the sector risk for certain industries that are dependent on trade with Ukraine or Russia; influences the buyer risk for specific customers or suppliers that are involved in trade with Ukraine or Russia; and affects the payment terms for trade finance transactions involving Ukraine or Russia. The war in Ukraine also increases the demand for credit insurance by Ukrainian businesses who want to protect their receivables from potential losses or diversify their markets or sources.
