Lack Of Trade Credit Insurance Hampers US Supply Chains

In another barrier to the American economy’s stop-and-start recovery, insurance administrators, customers and brokers say that trade credit insurance has been significantly reduced for U.S. firms, a lack that has hampered American supply chains, The Wall Street Journal reported.

Suppliers get insurance to protect them in the event that a buyer doesn’t end up paying, and financial institutions (FIs) leverage the financial tool to insure deals that they support. However, insurance companies are less amenable to writing policies for metals like nickel and aluminum because of difficulties in the industries that buy those elements.

The airline and automotive sectors have faced declining sales amid COVID-19, and steel manufacturers have long encountered strain on their bottom line. As a result, there is the potential that firms might not honor agreements to purchase metals. Since firms are hesitant to move items without coverage, metal shipments are often scuttled or postponed.

LiquidX Inc., the trade finance firm, indicated per the report that nearly 50 percent of insurance requests were given the green light in 2019 up to mid-September, compared to 14 percent for the same time in 2020.

Credit insurance is popular with U.S. firms that don’t have wide profit margins and can’t run the risk of buyers not paying, although it is less common domestically than across the pond in Europe.

Imperial Zinc Corp. President Jay Sandler told WSJ that “credit insurance is an extremely important tool for our business.” A sizable share of the aluminum sold by the Illinois-based firm arrives in the auto sector, a space in which the number of policies has dwindled.

As noted in May, production in the auto industry has been brought to a standstill due to COVID-19, and vehicle sales have suffered during a large drop in consumer demand. With sales and orders dropping and production idling, suppliers were struggling at the time.

Forecasts of a $1.5 trillion trade finance gap were concerning when they emerged a number of years ago. But the figure also presented an opportunity for FinTechs when the market was ready for banking change and virtualization.