On average, premium rates are expected to increase between 5% to 10%, even for policies with a no-claim history.
The big difference between the 2009 financial crisis and the Covid-19 crisis lies in the extraordinary state support measures with which many countries have kept their economies up and running. However, both crises have one thing in common: the fear of payment defaults and an increasing number of bankruptcies.
After the pandemic spread all over the world last year, the trade credit industry experienced almost a year of extreme uncertainty, mostly due to the lack of a long-term outlook. Credit insurers reduced their overall risk exposure and adjusted both their individual and sector exposures to bring their portfolios under control. This affected supply and demand.
State aid during the pandemic has contributed to preventing a wave of corporate insolvencies. Some governments have provided state support schemes to trade credit insurers. In general, the aim of the state support schemes during the pandemic was to stabilise global supply chains. By the end of June 2021, these state support schemes to trade credit insurers have expired.
So far, trade credit insurers have navigated the crisis quite well. Fitch Ratings expects the sector’s 2021 results to be robust, supported by continued low payment defaults. Generally, they assumed that the expiry of government-backed reinsurance schemes will have a positive impact on the sector in the next 12-24 months
as insurers who have agreed support schemes with the state will no longer have to share earned premiums.
Underwriting stance – the “new norm”
Once again, the credit insurance sector is called to action. The rebound in the economy as well as economic developments must be supported by the credit insurance industry with sufficient revolving cover for goods being delivered or services rendered. Hence, credit insurers have started to increase their risk appetite for new business and different needs as the pandemic has had an unequal impact across companies, industries and sectors, and sometimes even within them.
Understanding what is really risky and what is not essential, will be the “new normal”. Credit insurers’ underwrit- ing will have to go beyond financial results as the “new norm” of risk assessment will put more weight on aspects such as the crisis resilience of business models, cash position versus cash burn, regular financial reviews and a sector-specific outlook. As the global economy is catching up again, credit underwriting will strive for a clear picture of the new risk profiles and their risk potential. Besides that, credit insurers’ risk underwriting can no longer turn a blind eye to important ESG trends.
Expected defaults – still expected to rise
According to Euler Hermes, Q1 and Q2 sector reviews see a shift of sector ratings back towards more positive territories, bearing in mind that risks remain, like weak sectors, inflation, or severity.
Currently, no dramatic increase in payment defaults is expected. Credit insurers could face increasing claims from historically low levels starting in 4Q21/ 1Q22, particularly in the sectors most severely hit by Covid-19, e.g. the travel industry (airlines, restaurants, hotels, etc.), small and medium-sized enterprises were financially weak prior to the Covid outbreak. Certainly, there will be the one or the other major loss that one could not foresee in 2020. Every year or so, a high-pro- file insolvency involving high losses reminds us of the significance of trade credit insurance. In general, the forecast economic upswing will facilitate a rapid recovery in sales and will limit the wave of bankruptcies.
Businesses cannot expect that credit insurers will lower premium rates in 2021 because of a low level of insolvencies. Furthermore, insurers cannot yet estimate the effect of the spread of the Delta variant on the economy. This uncertainty also affects the development of the rate of premiums because the overall risk situation has changed as a result of the pandemic. On average, premium rates are expected to increase between 5% to 10%, even for policies with a no-claim history. Hence, the focus is on achieving price stability as well as greater flex- ibility on the policy structure of well performing clients. Top performers, however, will continue to have an increased risk appetite.
Group Practice Leader Credit & Political Risk
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