Insolvencies, state protection scheme, StaRUG and Co.: what's next in credit insurance?
The corona crisis is causing some turmoil in the German economy. Government measures, such as the suspension of the obligation to file for insolvency or the protection scheme for credit insurers, should help to mitigate the consequences of the Covid-19 pandemic. What happens after the measures expire? What impact will new legal regulations have? And what should clients expect in the credit insurance market? Funk provides you with an overview of the most important developments.
1. Insolvency figures and gross domestic product
Like in many other countries, the number of insolvencies declined to a historically low level in Germany. After about 18,750 in 2019, 16,076 insolvencies were reported for the year 2020. According to Allianz Research, for 2021, a moderate increase of insolvencies is expected that is likely to accelerate in the coming years.
The gross domestic product (GDP) shrank by 5,3 % in 2020. The German Council of Economic Experts is expecting it to recover by 3,1 % in 2021 (4,0 % in 2022).
The development of insolvencies and the GDP can be assumed to also be the result of some significant influencing factors like:
- retarded vaccination of the German population
- lively demand for German export goods, especially from China
- extensive state support programs for companies to remedy the negative effects of the Covid-19 pandemic
- suspension of the obligation to file for insolvency until April 30, 2021 (introduction in March 2020, then multiple prolongations until the end of April 2021, each time with a reduced scope)
Suspension of the obligation to file for insolvency: March 2020 to April 2021
Initially applicable for both circumstances that constitute insolvency – illiquidity and over-indebtedness, verifiable triggered by the negative effects of the Covid-19 pandemic. Later in the year 2020 limited to over-indebtedness and since January 2021 until its end again applicable for over-indebtedness and illiquidity, but limited to those companies that applied for governmental support but did not yet receive it. That is why experts believe that the expiry of the suspension will have no major impact on the insolvency figures.
“Compared to the pre-Covid situation, the level of uncertainty regarding the economic development and the occurrence of insolvencies is high”, says Sebastian Kentenich, head of the credit division at Funk. “The gap between the best-case and worst-case scenarios has widened in recent months.”
2. Expiry of the German state protection scheme for credit insurers
Set up in April 2020, the 30 billion euro German state protection scheme for credit insurers will expire June 30, 2021. This decision was taken by the German government and the participating credit insurers. After a prolongation of the scheme in the end of 2020, both parties are now of the opinion that the measure is no longer required as major parts of the economy started to recover. Credit insurers see themselves capable of assessing and carrying the risk duly.
“According to the carriers, policy holders generally do not need to worry about extensive credit limit reductions or cancellations”, Sebastian Kentenich explains. However, there are some credit limits in the portfolios that are currently maintained (only) based on the scheme. Those credit limits will be reduced or cancelled after June 30. In most cases and where there is no immediate threat of a buyer’s default, a notification period will apply, allowing suppliers to adapt to the new situation.
3. Credit limit underwriting by Euler Hermes
In the course of the pandemic, the credit insurer Euler Hermes (EH) chose a different approach than its competitors. EH’s approach was based on so-called grades, which reflect a buyer’s creditworthiness on a scale of 1 to 10: grade 1 stands for the best possible creditworthiness, grade 10 for insolvency. On a wider scale EH gave notice of credit limit cancellations as per the expiry of the protection scheme (initially December 31, 2020, after its prolongation June 30, 2021), mainly for buyers with grade 6 or higher. So those restrictive decisions were not based on the particularities of the individual buyers, but it was more a “portfolio approach”. However, due to the expiring protection scheme, EH recently decided to reinstate many of those timed reductions and cancellations.
4. Credit insurers’ policy underwriting and renewals
Credit insurers aim to increase the premium level upon renewal, even for claims-free policies. Sebastian Kentenich: “However, occasionally for – from their perspective – attractive pieces of new business, the insurers’ offers are quite aggressive, both in terms of pricing and the offered scope of cover.”
5. Consequences of the Stabilization and Restructuring Framework
The new legislation Stabilization and Restructuring Framework (in Germany referred to under the abbreviation StaRUG) sets out the EU directive 2017/1132 (directive on restructuring and insolvency). It became effective as per January 1, 2021.
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The main objectives are:
- enabling restructuring measures at an early stage
- access to early warning indicators
- corporate debt relief prior to (orderly) insolvency procedures by implementing a debt settlement plan and suspension of enforcement measures, which need to be agreed on by a 75 % majority of the creditors (in relation to the outstanding receivable amount) – no need to reach an unanimous vote like previously in pre-court proceedings
- avoidance of the stigma of an insolvency by the debtor
- contribution to a “restructuring culture” via the StaRUG
Credit insurers confirmed that debt settlement plans that are implemented under the Stabilization and Restructuring Framework are being considered and treated as a claims event under their trade credit policies.