The introduction of the novel coronavirus pandemic into the global economy starting in late 2019 created a level of disruption not seen perhaps since the world’s last major conflicts. As we move through what we hope to be the later stages of the pandemic, we thought it might be helpful to explore its impact on the trade credit insurance marketplace and highlight what we can anticipate in the months and years ahead.
Throughout the world, surges in cases of the virus caused a significant portion of the global economy to shut down in a manner that was/is unprecedented in recent history. This significant curtailment of economic activity brought most of the service sector (travel and leisure, entertainment/restaurant industry) and a big segment of the manufacturing sector to either a grinding halt or intermittent disruptions. Consumer demand dropped and unemployment spiked. As economies reopened, rebounds were relatively sharp but left many countries still well below prior levels of economic activity, and currently, the second round of lockdowns continues to beleaguer a good number of countries.
During this period, the trade credit insurers experienced a significant jump in claims activity, requiring them to invest heavily in more carefully scrutinizing credit risk profiles and to take restrictive actions both on current insured credit limits and on new credit limit requests. Some governments provided additional “reinsurance” support while others did not. This also had a direct impact on the insurers’ ability to maintain coverage and risk appetites.
At the current stage in this ongoing saga, most insurers have completed comprehensive portfolio reviews, adjusted their coverage capacity, and realigned their risk appetites with an eye toward what we hope to be a more positive economic trajectory in the year ahead.
For those who rely on credit insurance as a borrowing enhancement, sales expansion tool, for decision support, and /or simple catastrophic loss protection, it has been a challenging time. Looking forward, policyholders and their lenders will want to bear in mind that defaults tend to lag economic downturns, so there is still significant risk yet to surface as the world’s economies push through a second surge and look to reopen under the promise of increased immunity and vaccine support as well as economic stimulus efforts.
This translates into a few important considerations for policyholders and their lenders:
-Risk appetites are going to be skewed to the more cautious side. Coverage in a number of sectors will be somewhat limited for some time to come.
-Given the persistence of default risk beyond the peak of a downturn, we can expect a more active risk-management approach on the part of cancelable limits underwriters and to see more limits approved on a temporary basis with the non-cancelable limits underwriters.
-The ability to secure current financial information on key buyers is going to be more critical than ever as insureds look to maximize coverage in the face of a rebound in demand. Financial statements are only going to give a current picture based on how the business fared through the recent period. Accordingly, it will be very important to provide insight into order books, demand forecasts, long-term contractual arrangements, and other forward-looking factors that can also help support coverage. For a lot of companies, the positive impact of any meaningful economic rebound is not going to be reflected in financial statements for several reporting periods ahead. The more information on present and anticipated future activities you can provide, the more you’ll be able to support needed credit limits.
-This means you can expect and will need to be prepared to get more involved in sourcing information and assisting your agent or broker in pursuing information on your behalf. This is an information-driven business, particularly when risk is elevated.
-Premium rates and risk sharing (deductibles and coinsurance) are going to remain elevated for a while to come and alternative coverage options will be a bit more limited than in normal economic circumstances.
Presently, we’re counseling clients on a variety of approaches to help maximize coverage. This includes the following:
-Working with your current underwriter to structure limits around peak sales periods, agreeing to temporary limits, and/or offering more risk sharing or additional premium in specific key account situations.
-Depending on your provider, purchasing additional excess limits from them may also be an option.
-Alternatively, you may be able to secure additional layers of coverage through other underwriters who provide excess programs.
-For very speculative grade risks, put options may also be worth exploring.
Ideally, to assure you’re not missing any viable coverage opportunities, you’ll want to consult with an experienced specialty broker who has the entire market at their disposal and the experience and relationships in place to help you source the right custom-tailored solution for your specific needs.
In spite of the tremendous economic disruption and a meaningful spike in default risk, there is still a wide range of options available and in a vast majority of cases, they will prove to be very cost-effective and beneficial. All of the carriers who provide this type of coverage appear to be weathering the storm well and are continuing to provide fair and balanced coverage options with an eye to long-term partnerships.
While we’re not out of the woods yet, the path is much clear and the trade credit insurance sector is better prepared to support global trade going forward.
The views expressed in TSL Express’ articles are solely the views of the author and do not represent the views or position of the Secured Finance Network.
