The COVID-19 pandemic has affected everyone in many ways, but not everyone needs to have a holistic take on the consequences of a global lockdown. Trade credit insurers’ concerns are multifaceted, having to consider physical supply chain issues with the complex causations behind political risk. The 2021 Global Trade Review conference, as we have seen from our previous articles, involved insights from prominent professionals on a wide spectrum of subjects, and COVID-19 was no exception. This article will focus on the recent turbulations in trade credit insurance markets, with a particular focus on political risk exposure during the pandemic.
The Crunch of Credit Insurance—a State of Affairs
The Trade Credit Insurance market has consistently provided coverage for customers throughout the COVID-19 pandemic, with the UK Government’s State Support Scheme (SSS) managing to keep many companies afloat. Not every enterprise subscribed to the scheme, though—Jane Hull, Director of Credit at Tokio Marine HCC, described the rationale behind not participating. Negotiations regarding state support started in March of 2020; given that the burgeoning coronavirus was only at the beginning of its wrath, it was very hard for insurers to fully appreciate the potential risks that lay ahead. Navigating through the terrain was epistemically difficult. By the time that the Government was asking for enterprises to sign up, it was August. Hull explicated that the environment subsequently became a lot more predictable, allowing businesses to make decisions with confidence, and respected the efforts from the UK Government. Nevertheless, it was clear that there was a loss of control involved in the State Support Scheme; it initially involved paying 90% premium and retaining 10% of claims but was then changed to fronting 100% of the premiums while still retaining 10% of claims, amounting to a guaranteed loss. With shareholders in mind, it did not feel correct to Hull to take on an unnecessary risk when the company had faith in setting sail on its own. Reflecting on the 2008 financial crisis, Hull explained that there was an effort to avoid a mass cull of limits. Tokio Marine never resorted to such an approach and has no intention of doing so in the future; this meant that its returns filed stood at nil. While this rendered the SSS less relevant for Tokio Marine, Hull acknowledged that the benefits would extend further for those involved in more affected sectors, such as hospitality and retail. Hull also noted problems with the timing of the scheme, amounting to a changing of expectations very frequently across the board.
Jane Hull was correct in stating that credit insurance goes beyond mere insurance policies; it represents a valuable tool for unlocking liquidity with a glut of knock-on effect throughout supply chains. It is perfectly sound for an institution like Tokio Marine to not subscribe to the SSS, and Hull correctly pointed out the parameters set on when one could withdraw cover. Any loss of control can result in nasty consequences for the customer—particularly those seeking longer-term trading relationships. Fortunately, Tokio Marine maintained a solid portfolio of its risk exposure and so was better prepared to go it alone. Ewa Rose, the Managing Director at Aon Reinsurance Solutions, accentuated that credit and political risks accounts for a relatively small amount of reinsurers’ exposure, and that the expectations of losses were much worse than those that materialised. While there was a huge contraction in global trade, significant losses suffered by some banks, and event cancellations and contingency plans accelerated, premiums stood at relatively low levels in the insurance market. That said, an increased focus on longer-term clientele will entail greater political risk, as we will see below. Once again, it is important not to forget that many of these problems are sector-specific; Rian Urding, CFO at McLaren Automotives, summarised pandemic-induced problems for the industry. Despite having a global network of dealerships, the loss in demand took a toll on automotive production. Furthermore, its factory in Woking closed over pandemic-related concerns, making the delivery of goods for any remaining demand that much harder. In addition, frustrations to any member of the supply chain will be relayed to every other participant, making McLaren’s work much riskier. Nevertheless, Urding commended the UK Government for its support and that McLaren managed to maintain functionality. McLaren’s recovery sets a competitive precedent for other companies fighting for survival.
Subsequent Political Risk
Toby Vass, Chief Underwriting Officer of political risk and credit at Chubb Global Markets, offered an overview of the global context surrounding political risk in credit insurance. Vass inferred that it is important to identify risks when trading internationally, especially in emerging markets, before you can expect to manage them and no political risk will be the same for each company; they will depend on the market, the country and the type of business. Non-payments continue to be an increasing risk in developing economies, which has fed through to claims activity however, the impact has not been felt as greatly as was expected. This being said, it may only be a case of government support “kicking the can down the road” and delaying the inevitable. There are many policies that are still in place from decades ago, and the risks today are not the same as those from yesterday; Government legislation will take time to reform, but companies can take the initiative to change accordingly. Claire Simpson, Global Claims Director at Willis Towers Watson, stated that credit risks can be quantified into two categories. The first focuses on the rising levels no non-payments, particularly from developing economies, which affects claims activity. The second is the inevitable lag period of supply chain disruptions in 2020 only coming into effect now. Of course, financial disputes in less stable regions will permeate into political movements that can spur a wide range of societal effects. Simpson pointed out Zambia’s well-known default as a consequence of such. Political violence can now be considered a new class of risk exposure, with resource scarcity only catalysing the side-effects. Fraud can ossify through the overstatements of revenues and the understatements of debts; it is important for the credit insurer to be conscious of such.
Ian Ladd, Group Treasury of Insurance and Risk at Aggreko, pointed out the importance of securing long-term relationships with clients; it is a problem for insurers if their customers are looking for quick operations in foreign countries for a ‘get cash quick’ scheme. Establishing a good line of communication with partners and brokers early on in the arrangements is imperative for transparent operations. For instance, Sub-Saharan Africa has more levels of opaque funding and lower levels of confidence in financial services—for those conducting business in higher-risk regions, the insurer will be hyper-conscious of such exposure. Many insurers have altered their appetites for dealing with geopolitical risk, with many erring on the more conservative sides of dealings. Nevertheless, there remains a wide berth of products for clients, covering ex-proprietary actions by foreign governments, currency convertibility, and contract breach perils, just to name a few. Vass also made the important observation that multi-company equities maintained static activity from 2005-2015, but in the last 6 years saw a burst in growth, as well as an increase in demand for non-bank and private equity insurance. Stuart Ashworth, Head of Sales in Financial Solutions at Willis Towers Watson, concurred that risk management has continued to change and evolve throughout financial history, and made the point that bespoke services are imperative to secure the best working capital. As geopolitical trends continue to amplify regional conflicts, business security is essential for any SME to navigate through a post-pandemic milieu.
Global Trade Review 2021 Virtual Event: Conclusion
This article is the third and final piece covering the Global Trade Review 2021 conference. The subject matters covered by FinCred CF is by no means comprehensive of the insights offered by the individuals mentioned; we recommend viewing the content in full, which is available on demand at GTR’s website. This coverage on political risk and trade credit insurance is particularly salient as it requires a holistic approach to risk exposure. The COVID-19 pandemic instigated greater co-operation between the private and state sectors yet exacerbated regional and ethnic conflicts in various parts of the world. As we face a more globalist trade arrangement each year, it can feel like financial frictions are zero-sum games; one person’s loss is another’s win. Trade credit insurance, however, can cover the holes in decision-making and will bring business owners the confidence to fully utilise the opportunities presented to them. As political violence manifests through from strategic sanctions and civil unrest, there is rarely a better time to make the most of insurance packages.