Global trends
- Overall, the frequency and severity of losses in short term trade credit in 2021 remain at historically low levels. Credit insurer financial results during 2021 demonstrate a continuing (same) low level of loss trend that commenced over 12-months ago.
- Although it is widely reported that the global level of insolvencies will begin increasing in Q1 2022, credit insurers have, throughout the COVID-19 pandemic, been actively reviewing, managing their exposures on more vulnerable risks. This is particularly prevalent within EMEA, which is the region in which insurers have the biggest exposure and access to the most comprehensive financial information due to statutory reporting requirements. Consequently, a large increase in insolvency rates generally does not necessarily mean that claims impact will follow the same trajectory.
- In APAC close eyes are on The Evergrande Group in China, a Fortune 500 company with business interests from Real Estate to automotive. With more than US$300 billion in liabilities, a potential debt restructure looms, which could result in substantial losses for creditors. Whilst there are concerns over the economic contagion effect, most commentators believe that this event will not precipitate a new global financial crisis. Looking ahead to 2022, insolvencies are expected to rise across the region, with the highest Year on Year increases potentially in Australia, China and India.
- The expected increase in insolvencies is substantial, but the starting point is artificially low, as a consequence of additional protective measures introduced by many EMEA governments. For example, insolvency figures released by UK’s Insolvency Service reveal that whilst levels of insolvency are beginning to increase (ahead of Governmental support schemes winding down) the levels still remain subdued, at less than half 2019 levels.
- The winding down of various government support schemes available across EMEA, coupled with escalating energy and transportation costs, supply chain disruption and labour shortages are expected to hit the agricultural, food and drink sectors, coupled with the cement, chemicals and paper & pulp sectors hardest. Whilst these issues may be relatively short-term, businesses may be incapable of responding quickly to pass on those the increased costs, adding further pressure on already squeezed profit margins and draining the cash flow of businesses striving to recover in the new business environment. Consequently, the financial performance and cash flow of companies will continue to be closely scrutinised by insurers.
- It is reasonable to expect that, given the above, a return to 2019 claims levels by the end of 2022 is realistic, albeit that some spikes may appear initially across all regions, although the timing will vary, according to the speed of recovery in individual countries. 2019 claims levels were slightly increased, compared with 2018, but did not reflect the spikes witnessed following the 2008-2009 credit crunch.
- It is reasonable to expect that those spikes will be greatest in OECD members due to the mature statutory regulation and financial/capital systems in place.
- Although insurers loss ratios are currently much better than normal and their claims resources much quieter than expected, this means that individual claims are likely to be the subject of much closer scrutiny. Accordingly, it is an important opportunity for policyholders to ensure that their risk management systems, administrative, education and management information systems are fit for purpose.
