AM Best is expecting the unfolding coronavirus pandemic to result in significant losses for trade credit insurers.
However, the short-tail nature of the product may partly offset the negative impacts, allowing the trade credit insurers to reprice and de-risk their portfolios, although incurred losses could be significant and involve costly litigation.
AM Best notes that, as with any other type of insurance, contract wording and interpretation are important factors.
Additionally, force majeure provisions and government mandates may play influential roles in losses. International contracts may be subject to multiple jurisdictions and parties including the reinsurers, insured, customers, and other institutions.
According to the International Credit Insurance and Surety Association, the claims ratio for its members averaged 52% between 2006 and 2018.
During the financial crisis, insolvencies spiked dramatically; as a result, the claims ratio rose to 85% in 2008, and 87% in 2009.
With a global recession threatening the economy, AM Best believes an increase in bankruptcies, especially among industries or companies that are already vulnerable, is likely to lead to higher claims for trade credit insurers.
Given their high underwriting exposures, trade credit insurers tend to use a liberal amount of reinsurance to support their underwriting capacity.
Reinsurance may dampen the impact of net losses but the dependence on reinsurance also leaves insurers subject to changes in terms and conditions and vulnerable to capacity withdrawals in the reinsurance markets.
AM Best says this is partly mitigated through long-standing relationships with a well-diversified panel of reinsurance counterparties of high credit quality.
Longer term, trade credit insurers will have to reconsider their pricing, limits, recovery rate assumptions, and reinsurance strategies as a result of this pandemic.