'Clouds on the horizon': trade credit insurers face higher claim losses, AM Best says
Trade credit insurers face possibly higher claim losses in the months ahead as the global economy remains under pressure from rising interest rates, persistent supply chain bottlenecks and inflation, AM Best says in a report.
The rating agency says trade credit insurance is cyclical in nature, with economic crises tending to produce “elevated” trade credit losses.
The covid-induced slump was an exception for major trade credit insurers, who posted strong financial results due largely to huge government stimulus programs to support businesses and jobs.
However, many of these programs have since eased or been scaled back, meaning there will be less of a cushion for trade credit insurers.
“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 Covid-19 pandemic,” the AM Best report says.
“Hence, it is expected that, in the absence of any new major fiscal stimulus or government support measures, trade credit insurers will experience higher loss claims going forward, in line with the historical negative correlation between gross domestic product and insolvencies.”
AM Best says 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.
The measures mean trade credit insurers are able to quickly cut their exposure where required, and so reduce their outstanding limits to a buyer in trouble.
“The portfolio actions taken by trade credit insurers have put them in a good place to manage the increase in risk environment,” AM Best says.
“Nonetheless, AM Best expects claims ratios to increase in 2023 reflecting, first, a normalisation following the unusual years of 2020 and 2021, and second, the effect of an increasingly difficult economic environment.”
The rating agency says the magnitude of the deterioration in results will depend on how the economic environment develops as the year progresses.
“In the absence of a full-blown financial crisis, results should hold up well, supported by continued strong reserving,” AM Best says.
