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Rising geopolitical risk is driving up demand for export credit insurance, says a new Berne Union study, which warns that the market is bracing for a wave of Ukraine-related claims.

According to the association’s latest ‘Business Confidence Index’ report, providers of short, as well as medium and long-term credit and political risk insurance, have seen “strong” levels of demand this year.

The quarterly analysis, based on a survey of the Berne Union’s more than 80 members – including export credit agencies, private credit insurers and multilateral financial institutions – reveals that requests for short-term cover have been especially robust.

This trend has been driven by commodities business and is expected to continue into Q3 2022, the report says, “albeit at a slightly lower level”.

Such forecasts come despite, or partly because of, a bleak outlook for companies engaged in cross-border trade, with the war in Ukraine adding to existing headwinds and denting forecasts for global trade growth this year.

Corporates are facing numerous challenges, not least supply chain disruptions, labour shortages, inflated commodity and energy costs, as well as the impact of rising interest rates.

Meanwhile, corporate bankruptcies have been rising steadily since the Russian invasion in February, while sovereign defaults are also looking increasingly likely in 2022, the Berne Union says.

Demand for medium and long-term commercial and political risk insurance has been more “sporadic” over the first six months of 2022, following a robust performance in the second half of last year.

But the survey shows optimism among insurers, who expect a bump in requests in the third quarter due to overall high risk perception, despite some “hesitancy” around investment in new projects.

 

Dwindling appetite

Even as demand for export credit insurance rises, the Berne Union report notes that private insurers are becoming increasingly risk averse due to the rising threat of non-payment.

With risk appetite having remained “tepid” during the second quarter, private insurers indicated in the survey that their desire for new business will potentially decrease going into Q3.

Broadly, the market is expecting a sizeable uptick in claims due to a surge in war-related payment delays, as well as insolvencies driven by liquidity constraints and higher interest rates.

“Payment delays directly caused by the war are materialising for some insurers and there is a general expectation that liquidity constraints and higher interest rates will lead to increasing insolvencies in the third quarter,” the report says.

“For ST [short-term] business the expectation is a substantial increase in claims paid, while for MLT [medium to long-term] the material impact of payment delays will take longer to emerge unless more sovereign defaults start to materialise in late 2022.”

There is some optimism in the market, however, with public insurers indicating across both short, as well as medium and long-term insurance, that they expect to maintain or increase risk appetite.

According to the report, this is a “good demonstration of the market gap-filling mandate of public insurers of export credit and investment”.