As insurers squeeze their credit risk appetite over claims fears, obtaining cover in certain countries and sectors is becoming difficult. Over the next year, experts predict a raft of claims made from the private and public sectors, only serving to exacerbate this problem. At the same time, underwriters are seeing opportunities on the political risk side as there is a higher perceived risk of the destabilisation of societies, writes Maddy White.


For trade, credit risk appetite has been swiftly adjusted by insurers amid the pandemic, with minimum rating requirements, tougher credit analysis and a more sector-specific approach being taken, according to a bi-annual survey of underwriters by global insurance broker Gallagher.

The research also finds that 71% of respondents reduced their expectations of forecast credit income for 2020, with the rest having maintained or increased their projections.

“There is an awful lot of trade out there that, unfortunately, the market has no appetite for at the moment. Whilst the inquiries are the same as pre-Covid, and come with the same expectations, the post-Covid world is a different place,” Richard Bishop, director of financial and political risk at London-registered brokerage firm Parker Norfolk, tells GTR.

Bishop explains that insurers have fallen into a “safe place”, which makes placing business and supporting trade difficult. At the same time, some banks are withdrawing from trade and commodity finance, knocking the confidence of underwriters. In August, ABN Amro announced it was exiting trade and commodity finance. The next month, BNP Paribas shut its Swiss commodity trade finance business, and in November, ING announced plans to refocus its wholesale banking operations, including trade finance.

“When mainstream financiers step out of a role, the first people to step in are the ones that think that they can make quick money. This makes insurers more wary because they get the same sort of inquiries, but from funds or alternative financiers they do not know – there is a definite view that they can’t do the job as well as the banks do,” Bishop adds.

Meanwhile, on the political risk side, banks and insurers expect new opportunities to arise, driven by the perception of increased political risk as some governments face problems supporting their societies and possible destabilisations, finds the Gallagher report.

“There has been a definite uptick in interest in political risk rather than credit risk. I think businesses have recognised that credit is something that is going to be very, very difficult to insure,” says Bishop. “We are seeing a lot of the banks trying to structure transactions so that they’re not exposed to the credit risk, but so that they are potentially exposed to political risk, because that can still be insured.”


Country and sector overview

The Gallagher report points to oil and gas, aviation and tourism as sectors that are most “concerning” to underwriters. Oil and gas was also cited as the sector that credit and political risk insurance (CPRI) underwriters received the highest number of inquiries about. For the past five years, oil has suffered from low prices and a global glut; this situation has only been made worse by the pandemic, which has reduced demand even further.

Both Covid-19 and a poor oil price has led to “real scrutiny” from banks and insurers on risk selection in that sector, says Nick Robinson, head of political risk and structured credit at HDI Global Specialty SE, a global specialty lines insurer that recently set up a London credit and political risk team.

Elsewhere, there is more scrutiny from banks and insurers over metals-related risks and a focus on consumables and agribusiness. In terms of agribusiness, Robinson adds: “We have not seen a big increase in the trades themselves in that sector, but we have seen more demand for insurance capacity.”

As well as a more sector-specific approach, insurers are also concerned about the risk of sovereign non-payment. Zambia, Angola and Ecuador, were the top three countries cited by underwriters as being most at risk, finds the Gallagher report. Meanwhile, countries of most concern with respect to political risk include Argentina, China and Tanzania.

In October, Zambia, one of Africa’s biggest copper producers, warned of a potential default. The ministry of finance stated that if Zambia fails to reach an agreement with its creditors, given its limited fiscal space, it will be “unable to make payments and, therefore, fail to forestall accumulating arrears”. Many countries across Africa are at risk of default because of high debt levels, currency risk, low commodity prices and low financial inflows.

In Argentina, protests over the government’s handling of the Covid-19 crisis and the economic effect of lockdowns, as well as issues such as corruption, have increased political risk. The International Monetary Fund (IMF) is in talks with Argentina over a new loan;  the organisation distributed its largest ever loan of nearly US$57bn to the country in 2018. An October statement by the IMF relating to Argentina states that “the deep recession has led to an increase in already-high poverty and unemployment levels, the effects of which are being exacerbated by significant pressures in the FX market. These are exceptionally difficult challenges with no easy solutions.”

Across Latin America, political risks such as social injustices and civil commotion, which typically do not have a major effect on trade, are now being felt, says Paul Boynton, manager at EIA Global, a US-based CPRI broker. “This is because there is a question mark over whether Latin American governments have good enough economies to carry on supporting social programmes. Are they going to reopen fully and are they able to subsidise the struggling economies?”

Boynton adds that soft commodities, and the processing of them, have been hit hard across the region. “In Mexico, for example, we work in the cotton and textile sector which was locked down for about 90 days.

“Not only were they unable to make and sell their product, but they also had to pay their employees, [with] no government subsidy. These companies were deeply impacted by the time they came back online.”

But it is not only Latin America that is wrestling with deep political instability. The US has been divided by the November election, with current US President Donald Trump, who failed to secure a second presidential term, repeatedly making baseless election fraud claims as this publication goes to press, rallying his Republican voters to support him against US President-elect Joe Biden.

The US has been involved in a trade war with China since mid-2018, with tariffs imposed by both sides for economic and political gain. With the two sides having seemingly reached a truce in January with a phase one trade deal agreed, any progress made on mending the relationship was quickly lost as Covid-19 worked its way around the world, with Trump declaring that he was “not happy” with China for not stopping the coronavirus at its source.

Elsewhere, in Hong Kong, security laws imposed mid-year by China fuelled tension between the nation and several countries, including the UK and the US, with the latter going as far as revoking Hong Kong’s special status as it has not maintained “a high degree of autonomy from China” according to US secretary of state Mike Pompeo.


Claims not yet made, ‘zombie’ firms

Despite a more stringent approach taken by insurers, only 29% of underwriters surveyed by Gallagher in July report claims being made due to government action or a deterioration in credit attributable to Covid-19.

Within the transactional credit and political risk market, this is “somewhat expected”, reads the report. The exposures underwritten in this segment of the market are usually related to governments and corporates of a certain minimum size. So far, insured exposures have largely been the subject of waivers and payment extension as opposed to default, and consequential claims.

However, the insurance industry fears a wave of claims once extended payment deadlines are due. “From the conversations we have had with insurers, they feel that there is still quite some way to go before the full impact of the last six months is realised and understood on a number of economies around the world, our own included. There is caution amongst underwriters,” says Bishop.

Others point to ‘zombie’ companies kept operational by generous fiscal stimulus packages deployed by governments in advanced economies. When that support eventually runs out, those companies would become claims.

“Once the government support schemes start to expire and the fiscal stimulus is reduced and potentially not carried on, losses incurred will mean that insurers will potentially tighten their appetite further,” says Robinson.

He adds that, at the same time, this could lead to an increase in CPRI inquiry volume as clients’ risk management functions attempt to ensure that they have future protection in the event of a longer Covid slowdown. “Over the next year, we expect to see an increase in claims, followed by an increase in inquiry flow.”

Boynton says that the difficult part now is “getting through the rest of 2020 and holding on to insurance coverage”. As the trade and the commodities sectors recover, the hope is that companies’ Q3 and year-end 2020 financial statements reflect that, he says.

“Then we can go back to our insurance partners and say, ‘Look, things are going according to plan, they’re improving, we need you to stay with this risk and help our client work though the pandemic’.” If there are more lockdowns that cause further business interruption that would present more challenges. So far, he says, the situation is trending the right way.