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Further trade credit losses for re/insurers in 2020, 2021: AM Best

7th September 2020 - Author: Charlie Wood

As a result of the ongoing global economic crisis, AM Best is anticipating further trade credit losses for both insurers and reinsurers across 2020 and into 2021.

AM BestEconomic Secretary to the Treasury, John Glen, announced in May that the UK Government would move ahead with the scheme following several weeks of discussions with the industry.

By providing temporary guarantees for transactions currently supported by trade credit insurance, the idea is to prevent the widespread withdrawal of cover across sectors such as manufacturing and retail due to the COVID-19 pandemic.

In June, it was confirmed that the UK’s trade credit insurance market will receive up to £10 billion of government guarantees.

AM Best notes that, despite the global economic crisis, there are mitigating factors to consider.

The short-tail nature of trade credit insurance should partly mitigate the impact on loss ratios for re/insurers.

AM Best says trade credit insurers can reprice and de-risk their portfolios in light of worsening economic conditions and that the leading players have taken substantial portfolio actions, including both reductions in exposures and increases in premium rate, since the onset of the COVID-19 crisis.

The actions taken by the primary writers will also help mitigate losses for their reinsurers, AM Best believes.

Additionally, as mentioned above, a number of countries have put in place government schemes for trade credit insurance to bolster their economies and ensure that trade credit insurance cover remains available.

The schemes differ in the details but they all provide a government backstop to ensure that the industry continues to provide insurance cover and forego their right to cancel or reduce available limits significantly.

At the time of AM Best’s report, schemes are in place in a number of European countries and Canada, while discussion is ongoing in other nations.

AM Best notes that there are other important markets, such as Spain, where schemes are now unlikely.

Moreover, the schemes are set to expire at the end of 2020, although there is already discussion ongoing about potential extensions.

Despite these mitigating factors, AM Best expects trade credit reinsurance to experience underwriting losses in 2020 and probably into 2021.

The level of losses is expected to be manageable for reinsurers, given the small size of this line relative to the balance sheets of reinsurers.

However, the impact will be more substantial from an earnings point of view, as trade credit reinsurance was a profitable line for reinsurers before COVID-19. AM Best will continue to monitor very closely the performance of the trade credit line for rated reinsurers.

Trade credit insurers are typically heavy users of reinsurance, using a combination of quota shares and excess of loss treaties to protect their capital against increases in both frequency and severity of losses.

Unlike the concentrated primary market, the reinsurance trade credit market is fragmented, with a large number of reinsurers maintaining a presence in this segment.

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