Claire Simpson, Global Claims Director for WTW Financial Solutions, Sam Wilkin, WTW’s Director of Political Risk Analytics and Emma Coffin, Head of Broking for WTW Financial Solutions, give a snapshot of developments in the credit and political risk insurance (CPRI) market and how sovereign debt defaults might play out globally.
Late in December 2022, Ghana suspended payments on the majority of its external debt, giving rise to questions over which sovereign could be next to default as the legacy of the Covid-19 pandemic, high inflation and high US interest rates continues to take a toll.
As the initial claims from Ghana’s debt crisis emerge, insurers are likely to see further loss activity materialise from the country this year.
“We are at the very beginning of the loss journey with our clients who have suffered non-payment losses in Ghana, particularly as the government may yet make good on past dues that came in before the cut-off date, though of course the longer-term horizon is more challenging,” says Claire Simpson.
The default places Ghana among several countries to have become unable to service their debts in recent years, including Zambia, whose default on its foreign bonds in November 2020 made it the first African country to fall prey to the economic costs of the pandemic. Zambia’s default continues to result in contract frustration settlements, accounting for 50% of WTW CPRI claims paid out in 2022.
Yet so far, capacity remains undented, with the market largely stepping up to offer capacity where needed.
According to recent WTW research, insurer appetite is up across the board, driven by larger line sizes from existing players and new entrants. Total notional CPRI capacity per transaction rose for 2023, with an increase of 19% for contract frustration compared to 2022 and 17% for transactional credit where the underlying contract is related to trade. Transactional credit risks not linked to underlying trade saw a capacity increase of 37%.
WTW Financial Solutions data shows that sovereign losses have played a crucial role in recent activity, with more claims likely to emerge in 2023.
Sovereign-related non-payment losses accounted for 65% of loss activity for WTW clients in 2022 –outweighing credit risk or political risk. Losses are not coming solely from post-pandemic legacy issues but also the broader impact of events in Eastern Europe, with the sanctions impact of the Russia-Ukraine conflict and its effect on countries like Belarus accounting for losses too.
In January, the International Monetary Fund (IMF) forecast a rise in annual inflation of 12% in Egypt, 17.3% in Nigeria and 28.6% in Ethiopia, while its list of low-income countries at risk of debt distress shows nine countries currently in debt distress and 28 at high risk of following suit, including Kenya and Ethiopia.2 According to the IMF, public debt now represents almost 40% of the global total, the highest level in six decades.
Yet despite this, there still appears to be an appetite for credit and political risk in the market.
Could this change? A series of economic shocks have pushed Pakistan and Egypt into contentious bailout negotiations, prompting concerns that these countries may follow Ghana, Zambia and Sri Lanka, which last year defaulted on its debt for the first time in the island nation’s history.
The world will also be watching the impact of critical presidential elections in Nigeria and, later on this year, Turkey, where it remains to be seen whether the devastating earthquakes that hit Turkey and Syria in February will harm current President Recep Tayyip Erdogan’s bid for re-election.
“Even though the peak of shocks should have passed, there are a lot of vulnerable countries,” says Sam Wilkin, adding that Turkey would have the greatest contagion impact should it default.
Wilkin cites the greater availability of capital throughout the pandemic as an unexpected contributor to current debt distress.
“A lot of emerging markets, for the first time in memory, were able to spend some money on their citizens during the steep pandemic recession. They did not face the usual hard budget constraints. That saved lives, but the bills are now due,” he says, adding that a strong dollar and food and fuel price shocks from the conflict in Ukraine led to further expenditures some emerging economies are having to repay.
“I am not sure many people remember what it was like to be in a world not awash in central bank money. It’s likely to be much harder for sovereigns,” Wilkin says.
Risks aside, CPRI claims are yet to rocket. “In the aggregate, claims are down year on year,” Simpson says.
“In spite of inflationary pressures and systemic shocks, the loss experience in the aggregate across all the pieces of our portfolio and different countries is down.”
WTW’s 2022 CPRI loss experience was US$61.9mn, a stark contrast to 2021, which saw claims activity of US$118.6mn, making it the fifth largest year of CPRI losses handled by WTW.
The fluctuation in claims activity is likely due to a more stable credit portfolio with higher rated and structured credits performing well.
But as credit losses look set to rise in 2023, the claims picture may well be different as companies remain under pressure from macroeconomic headwinds.
While capacity remains buoyant, the data also suggests that a shift in demand is taking place, moving away from emerging markets and towards developed economies. The top countries by exposure for WTW Financial Solutions are the US and the UK, followed by Saudi Arabia, Chile, Mexico, Singapore, the Netherlands, Sweden and Panama.
WTW capacity booked for the UK stands at US$840mn, while Pakistan and Egypt have little to no capacity, notes Emma Coffin. She adds that policy exposure in Turkey sits at US$550mn, which could spark a shock to the insurance market were it to default.
Thus far, political violence insurers also remain steadfast.
“Some insurers have pulled back because of Ukraine, but we thought it would be worse. The political violence renewal season seems to have gone far better than I think we were perhaps anticipating,” Simpson says. “Appetite is bound to change. With every knock people’s appetite changes. It’s how long it changes for,” she adds.
While further sovereign defaults may be coming down the pipeline over the next 12 months and loss activity will likely increase from existing non-payment claims, the CPRI insurance market looks capable of weathering all storms.
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