Supply Chain Finance With Insurance: An Expanding Asset Class But Not Without Its Pitfalls
Structured CreditSummary
DBRS Morningstar published a commentary reviewing the supply chain finance (SCF) concept within insurance. The Coronavirus Disease (COVID-19) pandemic resulted in an unprecedented slowdown in global trade finance in 2020, resulting in the most challenging operating environment for complex multi-level supply chains. DBRS Morningstar expects the market to continue to grow with new innovative structures coming to light, despite the recent coronavirus-induced slowdown.
Key highlights:
- Invoice financing and loss insurance both have existed for centuries, but marrying the two together in structured form has created some innovative structures.
- Trade and SCF are both expected to grow and get ever more complicated.
- Investors should tread carefully in the complexity of structured note form SCF structures where losses are covered by third-party insurers or guarantors.
“The nature of insurance contracts means that they only pay out once an insured event has occurred. There is plenty of grey area, despite the attempts to document all potential events, where an insurer may not pay out for a plethora of reasons, adding an additional dimension of risk unrelated to the credit strength of the insurer,” said Mudasar Chaudhry, Senior Vice President, European Structured Credit at DBRS Morningstar.