Credit insurers saved from colossal Covid losses due to state support

Credit insurers will remain buoyant amid the current Covid-19-related economic recession as trade credit backstops provided by governments will ensure losses won’t loom as large as they did during the 2008 global financial crisis, said credit rating agency Fitch Ratings.

The agency predicts that pandemic-related credit insurance claims will peak in late 2020, as well as continue well into 2021, however “credit insurers’ financial performance should then improve as they re-underwrite business at higher prices to recoup losses and meet higher demand”.

State support has proved a vital lifeline for this segment of the insurance market. Across the world, governments have created schemes designed to ensure that “credit insurance [is] to remain available even when insolvency risks are too high to be otherwise insured and should significantly reduce net losses for credit insurers”.

In the UK, for example, the government launched its Trade Credit Reinsurance scheme in May, which provides government guarantees of up to £10bn in order to help maintain trade credit insurance during the pandemic.

The scheme is available on a temporary basis for nine months, backdated to 1 April 2020, and running until 31 December 2020, with the potential for an extension if required.

In Germany, on the other hand, there is a quota-share programme, where the government takes 65% of insurance premiums and covers 90% of claims.

Furthermore, French credit insurer Coface had about 50% of its credit exposure covered by government support schemes as at the end of June 2020.

Fitch Ratings added that some governments are also offering supplementary cover. It explained: “Some governments are also providing supplementary cover above the limit provided by the insurer. If an insurer wants to lower its existing limit for a particular client, the government will take on at least part of the cover that the insurer is cutting. France was the first country to implement this approach. Other countries, such as Canada and Portugal, have followed.”

Increased demand

Demand for trade credit insurance is also set to escalate in the medium to long-term, Fitch Ratings said.

“We expect increased demand for credit insurance in the medium to long-term as a result of the pandemic, as corporates and SMEs increasingly recognise the benefits of having cover.

“If increased demand persists, it could enhance the business profile of providers and strengthen their credit quality. In the short-term, however, we expect economic weakness to reduce business volumes, although the impact effect on revenues should be mitigated by price increases to reflect the market’s increased view of risks.”

The agency additionally gave its view on trade credit insurance’s key market players.

It said: “The three leading global credit insurers, Atradius, Coface and Euler Hermes, which account for the bulk of the global market, entered the crisis with very strong regulatory capital ratios. We do not expect these to weaken materially in the next 12 to 24 months due to lower business volumes stemming from economic weakness and to the capital relief that comes from the government support schemes. The risk covered by the schemes does not contribute to regulatory capital requirements.”