German credit insurers brace for spike in corporate insolvencies

German surety and credit insurers are reporting rising defaults on payments, up almost 50% in 2022 compared to 2021, and a real “struggle for survival” along supply chains in parts of the economy.

According to a projection by the German insurance association, the GDV, commercial credit and surety insurers will have claims of almost €700m this year, significantly higher than 2021. It fears that corporate insolvencies in Germany could rise by as much as 20% in 2023.

“We are feeling the toxic effects of simultaneous crises. The Ukraine war, high inflation and global supply chains that are still tight due to the pandemic are causing growth in Germany to weaken and payment morale to drop. In parts of the economy, there are signs of a real struggle for survival along the supply chains,” said Thomas Langen, chairman of the GDV Credit Insurance Commission.

German credit insurers see increased risks in almost all sectors according to Langen.

“Energy-intensive industries such as steel or chemicals are hard and directly affected by rising oil and gas prices. At the same time, inflation is affecting consumer sentiment and higher interest rates are hurting the construction industry,” he said.

In the automotive industry, the structural change requires high investment with rising financing costs. This leads to “immense pressure” in the entire value chain, explained Langen.

Credit insurers are therefore expecting double-digit growth in corporate insolvencies for the coming year: “We think an increase of 15%-20% is likely. Then the number of insolvencies would rise from the current 14,000 to 16,100-16,800,” said Langen.

The GDV explained, however, this is not a wave of new insolvencies, but a normalisation after years with unusually few insolvencies, presumably partly because of the relaxation of the rules surrounding insolvencies introduced by the German government during the height of Covid-19.

“The increase we are forecasting is not a horror scenario, but a natural and necessary part of a functioning economy,” said Langen.

In the currently difficult economic environment, German credit insurers will cover higher default risks than ever before in 2022 at €588bn (+11%). In addition to the cover volume of commercial credit insurance (€510bn), a further €78bn comes from deposit insurance policies, with which insurers provide sureties and guarantees, said the GDV.

“According to the association’s estimates, the limits covered by German credit insurers represent around one sixth of German exports and thus also make a significant contribution to the security of the German export economy,” said Anja Käfer-Rohrbach, deputy general manager of the GDV.