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Stronger capital driving positive outlooks for credit insurers, says Moody’s

1st March 2023 - Author: Jack Willard

A report from Moody’s Investors Service says that trade credit insurers, which insure sellers against the risk of non-payment, are well placed to cope with an anticipated increase in claims in the months ahead as global economic growth begins to slow.

Moody'sThe firm notes that although the sector has expanded its insurance coverage since the end of the pandemic, it has maintained “strong underwriting discipline” and also remains “strongly capitalized.”

The report highlights how the introduction of Solvency II in 2016 has forced insurers to increase their capital and strengthen their risk management, which is clearly reflected in its average Solvency II ratio of close to 200%.

Moreover, the sectors strong 2022 profit will help it absorb unexpected large claims, including those that are related to the January 2023 bankruptcy of Brazilian retailer Americanas, as well as the ongoing conflict between Ukraine & Russia.

Moody’s notes that some insurers have also improved their diversification, or obtained stronger parental support, with the firm stating that the combination of these factors support positive outlooks for the leading credit insurers.

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Furthermore, the report highlights how the credit quality of risks insured has vastly improved from where it was before the COVID-19 pandemic. Even though credit insurers have been offering more coverage for their clients since the end of the pandemic, along with prices beginning to decline too, they have still remained highly selective. As a result, Moody’s states that the quality of their risk exposure is better than before the pandemic.

The report reads: “The industry has moved away from sectors or customers with high exposure to inflation and supply chain disruption, which began during the pandemic. We therefore estimate that credit insurers’ premiums relative to the risks they take on are in fact higher than before the pandemic, and we expect insurers to remain disciplined.”

Meanwhile, Moody’s estimates that challenges are set to emerge, as trade credit insurers are likely to experience an increase in claims in the months ahead, due to a slowdown in economic growth and a consequent rise in credit default rates.

The firm added that it expects real GDP growth in the G-20 economies to decelerate to 1.3% in 2023, significantly lower than their previous estimate of 2.1%, and down from an estimated 2.5% in 2022. This decrease in GDP growth is expected to be driven by weaker economic activity in advanced economies, notably within Europe and North America, which account respectively for 69% and 12% of trade credit insurers’ exposures.

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