Trade credit insurers will suffer a jump in claims from the new coronavirus outbreak, but are well-positioned to cope, according to market participants.

And while they are reducing their exposures in response to the pandemic, insurers are also applying lessons learned in the 2008 financial crisis to help their clients weather the storm and protect their own reputations.

Claims on the way

Trade credit insurance protects suppliers against non-payment or late payment for goods or services provided on credit, typically triggered by financial difficulty or insolvency of their trading partners. As a result, trade credit insurers are particularly exposed during economic downturns.

The collective claims ratio for members of the International Credit Insurance & Surety Association, or ICISA, jumped to 84.9% in 2008 from 45.6% in 2007, and rose further to 87.0% in 2009 because of financial crisis claims.

The coronavirus outbreak has already contributed to some insolvencies, such as long-struggling U.K. home furnishings company Laura Ashley. Although the picture is still highly uncertain, travel restrictions and the enforced closure of bars, restaurants and theaters to curtail the spread of the virus are expected to push more firms into financial difficulty.

James Steele-Perkins, senior credit and political risk underwriter at Cincinnati Global Underwriting Ltd., said via email that the trade credit insurance market is "highly correlated" with the production, processing and sale of commodities, so "naturally we're heavily exposed to the entire supply chain."

He said that although the impact was "anyone's guess," there would be "delays, restructurings and no doubt insolvencies, particularly within the more volatile sectors — clearly the energy industry being one and the aviation sector another."

Scott Ettien, global trade credit head at broker Willis Towers Watson PLC, said insurers are expecting "severe spikes in insolvencies, which is going to trigger a lot of claims activity." Insurers would also need to set aside reserves for payments that were past their due dates, pushing up their overall incurred loss levels, he added in an interview.

He projected that the three market leaders — Atradius NV, Coface SA and Euler Hermes Group SA — "are going to get hit with the highest number of losses," although all trade credit insurers will face claims.

The increase in claims is likely to hit underwriting performance, according to Manuel Arrive, a director in the insurance group at Fitch Ratings. He said in an interview that Fitch was expecting a "deterioration in technical results" as "claim rates should be increasing significantly due to the rising corporate insolvencies in a context where global GDP growth is being crushed."

A resilient market

While trade credit insurers' underwriting results may suffer, capital levels are not at risk, for now at least. Robert Nijhout, executive director of ICISA, said in an interview that the industry is "extremely well-capitalized" thanks to Europe's Solvency II regime and that the industry's 2019 performance was "very, very good."

Ettien noted that while typical economic cycles last between six and eight years, there had been roughly 12 years since the last severe economic downturn, and that "during that time the carriers have been financially doing very well and are well-capitalized."

Nijhout also said that although the outbreak could prompt a wave of corporate insolvencies, trade credit insurers are "geared up for this — this is how we are capitalized, this is how we are organized, this is how we are also in control of the risk we are underwriting."

Arrive said the short-term nature of trade credit insurance meant that insurers could react quickly by implementing risk measures, such as reducing coverage limits. The big three trade credit insurers provide cancellable cover, which allows them to reduce or withdraw coverage limits if a customer looks likely to go bust or be unable to pay, thereby reducing their and their insureds' exposure.

Insurers can also put up prices, Arrive said, adding that Fitch was expecting "double-digit" rate increases. Ettien said he was expecting prices to go up by more than 10% for new business, while price increases for existing clients were "probably going to sit around the 10% range."

Lessons learned

Trade credit insurers' efforts to reduce their exposure through lower limits and higher prices could risk client relationships, however. Reducing limits "is a risk management tool that they have here but they need to do business and not lose their clients," Arrive said.

Ettien acknowledged that "some people are going to get upset" because of canceled credit limits and that "it's not going to be a perfect world from that perspective." But he added that "nobody is taking any drastic moves, any knee-jerk reactions" on pulling back coverage, and that both insurers and clients seemed to be "very level-headed" in their responses.

He added that insurer response to date has been "night and day" compared with the 2008 financial crisis "and in my book they get an A+ on how they are reacting so far."

Nijhout said ICISA's member insurers were being more flexible on extensions of customer payment deadlines. This would typically be "more frowned upon because we want to know why companies don't pay," but given the pandemic it is "much, much clearer" why there is a delay, he said.

The reason for insurers' measured response, according to Ettien, is the lessons learned in the 2008 financial crisis. He recalled that at the time the big three insurers were giving one day's notice of credit limit cancellation, which "created a lot of problems." Since then, he said, they have introduced a "delayed effect of cancellation" endorsement to policies, allowing insureds time to reduce their exposures to troubled customers gradually over a 30-, 60- or 90-day period, provided that customers were not insolvent or already 60 days past their due payment date.

Ettien said he expects the delayed effect endorsement to be tested during the coronavirus pandemic but that it will "have a positive impact in this downturn for our insureds."

He added: "I think our reputation at the end of this is going to be stronger than what happened when we came out of 2008 — much, much stronger."