Opportunities and risks for trade credit insurersCredit: Shutterstock/GH Studio

Opportunities and risks for trade credit insurers

Andrew Milne and Alex Baddeley, part of the insurance and reinsurance team at CMS Cameron McKenna Nabarro Olswang, warn that there are upsides and downsides as demand for trade credit insurance looks set to increase

Major economies have seen a return to economic growth after sharp contractions in performance in 2020 due to the pandemic. While Covid-19 will continue to be a top concern for many months (and possibly years) to come, the development of effective vaccines has started to allow life to return to some sort of normality.

This year has already seen a rebound in commodities prices, with the World Bank reporting significant increases in the price of crude oil and natural gas, and metals and minerals, including copper, iron ore and nickel. The IMF is projecting global economic growth of 5.8% this year with major economies, including the UK, the US and China expected to outperform that figure.

This has been accompanied by a notable uptick in global trade, with the United Nations Conference on Trade and Development reporting a 10% year-on-year increase in the value of global trade in goods and services in the first quarter of 2021. It is forecasting a 31% increase overall compared to the low point of 2020, and more surprisingly, a 3% increase relative to pre-pandemic levels in 2019.

The uptick in global trade is likely to lead to an increased demand from businesses for trade credit insurance. An industry survey carried out by the International Credit & Surety Association (ICISA) found that 95% of respondents expected an increase in demand for credit insurance cover in 2021.

Rising levels of business concern about supply chain disruption, heightened by the impact of the Covid-19 pandemic and recently the blockage of the Suez Canal, may cause more companies to look at how best they can mitigate the potential losses. Trade credit insurance may be seen as a potential solution.

Rising claims

The claims impact of the Covid-19 pandemic was relatively muted for trade credit insurers in 2020. Although ICISA reported a 12% increase in claims paid to $3.8bn and a higher claims ratio of 60% (compared to 48%), this was significantly lower than had been expected at the start of the global spread of the pandemic.

This may in part reflect the natural lag between major loss events, such as pandemics, and the receipt of claims. It also may be a consequence of the measures put in place by national governments to support businesses and to avoid major job losses – such as furlough schemes, guaranteed loans and the UK trade credit reinsurance scheme.

Change is expected in 2021. Almost all respondents to the ICISA survey anticipated an increase in claims in 2021, including in Europe, Latin America and the US. The same view appears to be shared by many leading insurance brokers.

The unwinding and withdrawal of the government support schemes is likely to have a negative impact on claims. Businesses only able to survive due to government backed or guaranteed loans may find it difficult to continue trading without easy access to credit facilities. The gradual removal of moratoriums on commencing insolvency proceedings will likely result in more businesses going under. This could particularly impact certain sectors hard hit by the pandemic, including aviation, travel and live events.

The staggered economic and societal ‘bounce back’ from Covid-19 across the globe may also cause problems for those businesses that have managed to withstand the crisis a mismatch in international supply and demand caused by varying local restrictions and recoveries may disrupt previously strong supply chains. As business returns to normal, more fraudulent activity may be uncovered.

It will be important for trade credit insurers in seeking to mitigate the potential impact of claims to continue to carefully scrutinise both the clients seeking trade credit cover and the customers their clients are doing business with. Such due diligence will be both important and complex in the coming months, as most clients’ trading practices will have been severely disrupted or fundamentally altered during the pandemic.

Trade credit insurers will also have a new view of the vulnerability of certain sectors to pandemic-related disruption, such as hospitality and travel, which has resulted in their significant and near simultaneous cross-sector losses. Trade credit insurers may therefore reassess the scale and shape of their risk exposure.

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