A new report from AM Best addresses how trade credit insurers have continued to enjoy strong results through 2022, and that these results follow on from good performances from the last two years, and have come despite provisions from the conflict in Ukraine and the sanctions imposed on Russia.
The report highlighted how initial exposures—in particular to Russia—were substantial with a mixture of domestic (between Russian companies) and foreign (with international sellers and Russian buyers). Best noted that trade credit insurers have been able to manage these down quickly, and that it does not expect material losses from their exposure to Russia or Ukraine.
For year-end 2022, Best expects further growth in premium income. Trade credit insurance premiums are linked to policyholders’ turnover and trade volumes, and so automatically adjust in an inflationary environment.
Best also stated how due to the good experience of the last few years, this means that premium rates are once again declining after the strong increases seen in the previous two years.
Moreover, results from 2022 have continued to benefit from the low levels of claims frequency. However, the report adds that towards the end of the year, trade credit insurers noted the start of a normalisation of insolvency rates.
Meanwhile, Best stated that trade credit insurers are taking steps to anticipate likely challenges in 2023. This is portrayed by the current economic environment, characterised by supply chain disruptions, increased borrowing costs and high inflation, in particular for energy, commodities and food. All of this is expected to lead to increased insolvency rates and protracted defaults as margins are eroded and credit lines and other avenues exhausted.
Best speculates that government support for businesses in trouble due to energy prices and other inflationary pressures is likely to be much less than during the first 18 months of the pandemic.
The report reads: “It is expected that, in the absence of any new major fiscal stimulus or government support measures, trade credit insures will experience higher loss claims going forward, in line with the historical negative correlation between gross domestic product (GDP) and insolvencies.
“Trade credit insurers continue to review their portfolios and take actions to reduce their exposure to sectors as well as to individual buyers which they perceive to be at risk. Trade credit insurers are able to quickly cut their exposure where required, and so reduce their outstanding limits to a buyer in trouble.”
Best concludes by stating that the portfolio actions taken by trade credit insurers have put them in a “good place” to manage the increase in risk environment. Best, also noted that it expects claims ratios to increase in 2023 reflecting a normalisation following the unusual years of 2020 and 2021, as well as the effect of an increasingly difficult economic environment.
