The effects of Covid-19 on the trade credit insurance market

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  • The effects of Covid-19 on the trade credit insurance market
07 December 2020
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As the reliance on trade credit insurance increases during the Covid-19 pandemic, Edward Carter, Director, Corporate Functions at Human Capital, explores the new challenges in the trade credit insurance market and the demand to hire insurance managers at trading companies, industrials, and producers.

Despite positive news on the vaccine front, the Covid-19 pandemic continues to wreak havoc on businesses and their supply chains and economic forecasts remain gloomy for 2021. At the same time, the reliance on trade credit insurance is increasing, and yet capacity is tightening and the availability of cover for certain market participants is challenged.

The volume of global trade underwritten by credit insurers is estimated to be in excess of $3 trillion, according to the International Credit Insurance and Surety Association, and they play a key role in keeping global supply chains moving. However, in August 2020, one trading company chief told me the insurance market was in “total chaos” as a contraction and hardening of terms that was already taking hold has been accelerated by the spread of the virus.

Not all traders are affected equally. Jing Wu, former Chief Financial Officer at agri-commodity firm COFCO International, says: “Some of the better positioned players have seen no contraction and have actually increased the size of discounting covered by credit insurance. However, all my contacts in the credit insurance industry confirm the trend. Some sectors are obviously seeing a contraction, but for feed compounders and other food-related businesses that buy our products, we have not seen any problems.”

Those businesses with low-credit counterparties are being affected the most. Mark Saunders, the new Global Head of Insurance at GFG Alliance, who was previously Global Head of Insurance at Trafigura, says: “It is certainly not a happy market at the moment, and it seems to be getting worse. From the middle of the year, a lot of credit insurers started pulling cover on various names; the market had been hardening anyway and Covid has accelerated that.”

He adds: “The market is continuing to support counterparties where there is more certainty and where they feel more confident, but where it’s marginal business or there is uncertainty over a company’s financial strength, they are being extremely conservative.”

There is evidence of insurers becoming less willing to write insurance policies for metals like aluminium and nickel because of the impact on industries like automotive and aviation. Commodities trader Traxys said in June 2020 that it will phase out its North American lead and zinc metal trading activities by the end of this year. Mark Kristoff, Traxys’ President and CEO, said that after participating in the North American lead and zinc metal industry for over three decades, Traxys is choosing to exit due to the deterioration of the credit coverage in the industry.

Even as demand for raw materials increases, companies are often reluctant to move goods without trade credit insurance. The situation is particularly challenging for smaller companies who cannot get access to finance. In the commodities sector, a lot of debt finance is utilised, but with banks reluctant to take on trade credit risk, that is having to be transferred to the insurance market. Traders are either having to cease trading with particular clients or find other ways to finance their trades.

“In the trading sector, a lot of debt finance is utilised, but with banks reluctant to take on trade credit risk, that is having to be transferred to the insurance market.”

Robert MacKay, Senior Business Development Manager for the commodities sector at Aon, says the situation has come about after a number of Lloyd’s insurance syndicates were told last year to improve their loss ratios, which demands either better underwriting to decrease losses, or increased premiums. “We have seen rates increasing by 10-15%, depending on the risk itself,” he says. “Credit insurance is definitely available, but we are seeing much more scrutiny of the risk itself, which means companies need to provide more information, and that information needs to be more recent. Insurers are asking for Q2 and Q3 figures already, even though those are not always available, and they are pressing for that extra detail.”

From the talent perspective, at Human Capital we are seeing a significant increase in the demand for insurance managers at trading companies, industrials, and producers. Companies are looking to upskill their insurance departments to cope with the effects of Covid-19 on the ability to obtain credit. Credit insurance policies need to be more robust and firms need to be able to respond to the increasing levels of scrutiny on their activities.

Our clients are coming to us seeking to hire individuals with deep experience in the insurance market, whether that is on the commodity trading side or in the industrials space. There are opportunities for individuals with extensive networks in the London market/broking community, who can bring a long list of contacts at a time when it is critical that insurance implications are managed effectively with regards to large-scale investments and business growth

So far, there is little evidence of the pandemic yielding late payments on trade transactions, but governments around the world have been pumping money into their economies to support companies dealing with liquidity challenges. But Coface, one of the three large providers of trade credit insurance alongside Euler Hermes and Atradius, forecasts corporate insolvencies will increase by a third worldwide between now and 2021. In its August barometer, it set out that the pandemic will weaken sectors already vulnerable last year, including automotive, retail, and textiles. Euler Hermes has adjusted coverage in accordance with increased risks and reduced trade volumes brought on by the pandemic.

Wu tells me the situation could yet get worse: “From a business perspective, we see some small to medium-sized companies becoming weaker while the largest players are gaining more business and stoking up competition in certain European markets. From a credit and credit insurance perspective, the hardest time of insolvency may still be ahead of us. The second round of the pandemic currently going on in Europe will more likely worsen the situation.”

Saunders does not expect any big shift in the market in 2021. “The market moves in cycles,” he says. “It has been soft for a long period so I would expect the hardening to continue for the next four or five years. Covid has accelerated things and that uncertainty has made things worse, but as the Covid crisis comes to a conclusion and the world returns to normal, the market will take an objective view. For now, if you’re an insurer in the credit space you don’t know how this is going to play out, so you are inevitably going to be conservative.”

MacKay says: “The last hard market was in 02/03 and that had to do with huge asbestos claims hitting the market, 9/11, and an economic downturn. At that time, we saw risk management shift to companies themselves, as they had to take more active steps to prevent losses from occurring through better procedures and better checks and balances.”

Going into next year, we are likely to see a greater number of bankruptcies due to a high volume of ‘zombie companies’ currently being kept alive through the pandemic by government support schemes. And it is wait and see for trading companies, he concludes: “Yes, there’s reduced capacity, but there is still enough capacity. It all depends on the business you are in and how many losses you might incur. If the loss ratio of your company is bad, then of course you will run into difficulties, because the insurance company needs to make money as well.”

Regardless of how long it takes the world to come through the coronavirus pandemic, challenges in the trade credit insurance market are unlikely to go away overnight. As a result, we expect insurance talent to remain at a premium well into 2021.

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