The epoch-defining upheaval caused by the Covid-19 pandemic has brought the insurance sector to the forefront in supporting companies and facilitating bank lending around the world. As 2020 draws to a close, market volatility remains at levels unseen since the financial crisis, while trade volumes are forecast to remain below pre-crisis levels until 2023. GTR speaks to three industry leaders to find out what the landscape looks like in terms of claims and losses, what the impact of government support for insurance has been, and what’s on the horizon for the sector.
The trade credit underwriter’s view: Neil Ross, global head of trade credit underwriting, AIG
GTR: What does the claims landscape look like?
Ross: We have seen some increase in claims frequency but not necessarily the quantum that has been predicted so far. Frequency is due to smaller companies being more impacted by Covid, but quantum to date is because of the level of government support that there has been across Europe and other markets.
However, I’m certainly not kidding myself that this is going to be much better than predicted, because the level of economic downturn that we are seeing in Europe and North America and other key markets is significantly worse than anything we’ve seen in the last hundred years. Many people are predicting we will see an increased level of insolvencies into the first half of next year, especially due to expectations that governments’ support won’t be able to continue forever.
GTR: Are you rethinking which risks are viable, and where do you see pricing going?
Ross: In 2019 we had already started to see indicators that we were getting close to the end of the positive credit cycle anyway, so we had started to adjust our underwriting criteria, specifically in certain sectors. We certainly hadn’t anticipated Covid, but the actions that we took at the end of 2019 and early 2020 we believe have put us in a good position relative to the market.
We have experienced 10 years of global growth and a relatively benign risk environment, which has led to increased insurance capacity and a softening market, so it is not surprising to see the market pushing pricing corrections due to a sudden and dramatic change in risk environment caused by Covid. The pandemic has impacted many different companies across sectors. Meanwhile, changes to policy structure, coverage or realigning country and buyer risk ratings are also being raised as part of renewal discussions.
GTR: Is there an increase in demand for trade credit insurance?
Ross: There certainly has been an increase in awareness, but I don’t think the increase in demand is as widespread as perhaps some people were predicting. However, I think when companies start to see orders increasing and their receivable balance recovering to historic levels, that is when we will see demand increasing. There will still be a lot of uncertainty and there will be new challenges for companies to assess the credit risk of their customers.
GTR: Where do you see the challenges and opportunities?
Ross: There is now more risk volatility and uncertainty than there has been for many years. I don’t think it’s just Covid that has caused this. We are seeing a lot more political and trading conflict between key countries, and we are seeing signs of more of protectionism, which is going to make for an increasingly more volatile risk environment. That will challenge underwriters to meet growing demand for cover from policyholders around the world. The pandemic has allowed underwriters to perhaps realign pricing and risk, but post-Covid, the global risk outlook is more uncertain.
The whole turnover insurer’s view: James Burgess, head of commercial, UK, Atradius
GTR: What is your outlook for losses?
Burgess: The economic impacts of the pandemic are inescapable and a higher level of loss is an inevitable consequence. Whilst the number of losses anticipated back in March have not materialised to the level expected by now, we are nevertheless seeing significant increases in trade credit insurance losses.
There are a number of government support schemes in place for businesses to help them through this extremely difficult trading period, including the support being given to the trade credit insurance market to ensure that providers can continue to write cover, and I think those efforts have to some extent suppressed the deterioration of some companies, and kicking the can down the road is probably the right way to look at it.
We undoubtedly expect things to get worse before they get better in terms of the economic environment and insolvencies in the UK and it is likely that the government will extend its reinsurance scheme into 2021. When the scheme ends, credit insurers will have to take stock and decide which of those risks protected remain writable. There are businesses now that are on the precipice, and without the government scheme, insurers would not be able to underwrite the risk. It’s as simple as that. That said, such cases don’t represent a large volume, and we are not particularly worried about them as we sit here today.
There are however some sectors that will inevitably be hit hard and the outlook remains challenging.
GTR: Is appetite still there to cover new risks?
Burgess: We have reduced some levels of exposure that we were writing, it’s important to recognise that a bad risk is a bad risk and even the backstop of a government reinsurance cannot change that. We work closely with our insured customers to understand their cover needs and make cover available wherever possible.
Our book is strong, and despite the challenging conditions still on the horizon we are confident that our appetite for new risk is positive.
GTR: What are you seeing in pricing?
Burgess: Trends around pricing in the coming months will continue in a fairly similar vein as throughout 2020. In line with the market we have adjusted our pricing strategy upwards, and we have been fairly successful in retaining our book while also being able to increase our premium rates and give a bit of stability to our top line.
I can see premiums increasing throughout 2021. The second half of 2021 will very much depend on what happens in the economic environment and what is going on with loss ratios at that particular time.
GTR: Are new companies coming in and asking for the product?
Burgess: At the start of 2018 we saw a significant upturn in the number of enquiries. That was on the back of uncertainty created around Brexit. We haven’t seen a particular spike on the back of Covid, however the number of enquiries we see now are still extremely high. They haven’t dropped from 2018.
GTR: What impact is Brexit having on your business?
Burgess: On Brexit, even now, nobody really knows what’s going to happen. In the absence of any substantial trade deal the economic challenges will surely heighten and, of course, supply chains will already be having to deal with logistical and regulatory changes in terms of moving goods and delivering services. However, we have been actively managing our business and risk portfolio in anticipation of Brexit impacts ever since the referendum result and so being ‘Brexit-ready’ is almost ‘business as usual’ for us. That said, nothing about 2020 has been usual. Managing risk is a normal day at the office for a risk underwriter and being on top of those risks continues to be our priority.
The reinsurer’s view: Ewa Rose, managing director, reinsurance solutions, credit and financial risks, Aon
GTR: What impact have government schemes had on the credit insurance sector?
Rose: Government schemes to support credit insurance are very much in focus. Most of them expire either at the end of this year or in the first quarter of next year, although a lot of them work on a risk-matching basis, so transactions which sellers or providers of services enter into now would still be covered in the run-off.
Each scheme is very different. In some places such as Poland, for example, there has been no take-up, whereas in Germany a large number of insurers have signed up, so it really varies from country to country.
Looking at the bigger picture, while these schemes to support credit insurance are important, they are a drop in the ocean compared to the trillions spent by governments on fiscal measures to support their economies. However, what I am positive about is that policymakers have started to understand the importance of the credit insurance market. And I think that’s something that we didn’t have before and certainly not to the same degree.
GTR: What happens when the government support stops? Are you expecting to see a wave of insolvencies?
Rose: That is exactly what everyone is speculating on. In terms of loss activity, the market hasn’t really seen that cataclysm that we were all expecting when the pandemic was spreading quickly at the end of March and into April, but there is a time delay effect, and, of course, companies don’t tend to cease trading on day one.
What has happened, particularly in Asia, is that there have been a number of large losses which are attributed to fraud. During the last recession, I was an underwriter, and I saw this pattern, because when there is a big crisis and a lot of volatility, suddenly cashflows dry up.
There are certain industries which are undoubtedly suffering, such as aviation. Certain airlines are currently being supported by a number of governments. But how long is this pandemic going to go on for? How long is it before some sort of normality returns and people start to fly frequently for holidays and business? It is very difficult to predict.
Then you have the continuing depression of commodity prices. We have seen some recovery, but until we see a rebound in the economy there will continue to be huge uncertainty in the commodity sector.
In general, the industry has avoided the losses of the pandemic partly because companies are still drawing on their reserves and the huge global governmental response, and partly because the global economy hasn’t completely collapsed. There is still an expectation that the rebound when it comes will be fairly rapid, which has been demonstrated in what is happening in China at the moment.
The really important point is that, compared to the 2008-09 crisis, there is a definite willingness of lenders to renegotiate repayments or waive certain requirements or covenants. That also helps to avoid a repeat of what happened in the financial crisis in terms of numbers of insolvencies.
So you have a more sophisticated world of finance, you have government support, banks are also urged by the governments to help rather than push companies under. Even in terms of sovereign lending, we have seen a drive from various multilateral governmental organisations to give holidays on repayments.
GTR: What are you seeing in terms of capacity?
Rose: In reinsurance, we haven’t really seen a pullback of capacity. As you would expect, we have seen more caution. There has been a far greater demand for information and requirements for quite granular data. The reinsurers want to have a real understanding of what sort of measures are introduced by the insurers in order to improve their risk assessment in light of the pandemic, and what they are doing in terms of controlling their exposures and possible losses. So, there is a real need for very high-quality information being provided. But at the moment, most reinsurers are still open for new business, so it has been a very professional and measured response from the reinsurance market.
GTR: Is risk pricing changing?
Rose: Yes, absolutely, and it really depends on the product. Each one is responding differently in terms of pricing, but on the whole, insurers are being more selective.
If they do not believe that the pricing is reflective of the risk, then they do not write the business.
In addition, banks have been sharing their margins more readily than previously, because they probably have greater need for our product. So generally, there has been an increase in pricing, but it really varies from region to region, product to product, and programme to programme.
