The inflation crisis resulting from the COVID-19 pandemic and geopolitical tensions in Europe and Asia have resulted in lower risk appetites among cautious trade credit insurers, according to an industry CEO.
Stuart Anderson (pictured above), chief executive officer for Asia at Australia-based National Credit Insurance, spoke with Insurance Business about how market conditions are affecting the trade credit insurance market and how he sees the situation playing out for the remainder of the year.
“The credit insurers are wary and cautious in their approach to credit risks,” Anderson said. “The last two years surprised many – with a dramatic reduction in insolvencies and bad debts due to the interim ‘COVID economy’ brought about by government support and moratoriums on debt enforcement. This has now changed, and insolvencies are increasing.”
Aside from growing insolvency rates, Anderson also noted the effect of rising interest rates combined with the inflationary pressures of increased raw materials and labour costs.
“Insurers are keen to grow yet cautious on the most obviously impacted sections of economies, such as construction, building materials, engineering and commodities,” he said. “The price of oil has fluctuated, peaking on supply constraints, and dropping with global recession fears. Regarding China, Asia’s trading powerhouse, the impacts of the long lockdowns have significantly affected already strained supply chains impacting many industries, notably automotive and electronics.”
In response to these global economic conditions, many Asian economies are adopting a protectionist stance to avoid local shortages.
“Asia has seen a new protectionist approach with measures such as export bans regarding; Indonesia’s palm oil, India’s grain, and Malaysia’s chickens,” Anderson said. “All were introduced to maintain domestic prices and supplies.”
While Singapore’s economy has continued its rather strong post-pandemic recovery, it is also struggling with the inflationary effects.
“Singapore’s productivity has bounced back to pre-pandemic levels, yet prices are increasing and there are knock-on effects,” Anderson said. “If we consider that long-term construction projects were bid and won on prior price assumptions, completing at the same price at a loss is an obvious issue. Market-to-market trades are also impacted when so much volatility is occurring in commodities and raw materials.”
With trade credit insurers now more averse to risks due to the volatile global economic climate, they are implementing more stringent controls and reduced limits.
“Gone are the days of solely assessing a buyer’s ability to pay; insurers have increased scrutiny on their policyholders,” Anderson said. “A seller’s strong track record and proven experience in credit risk management are now crucial to gain insurers’ support. On the buyer side, specific industries are being monitored for the impacts of price shocks to their balance sheets, especially “zombie” companies who managed to survive the pandemic through government wage support. Insurers are picking through their opportunities and highlighting the obvious concerns out there. We have not seen a raft of credit limit reductions and hopefully their exposures are supporting the right risks.”
Going forward, Anderson said that a global recession is realistically possible, so insurers and businesses must brace for a wave of insolvencies. However, he expects it to remain manageable.
“Sadly, a global recession looks like a possibility off the back of the inflationary pressures,” he said. “Insolvencies are likely to rise as sectors like construction and associated industries will be profit squeezed. I do not think it will be dramatic but non-payments, and thus claims, are expected to increase. Insurers are reluctant to support those industries bouncing back such as airlines and, more generally, the travel industry. These industries, whilst showing pandemic-related losses, will generate revenues again and I hope they will be supported considering the trend to enable further recoveries. Freeing hitherto pent-up tourism will provide more jobs and spending, which can only be a good thing.”