Higher claims for trade credit insurers expected but strong financial buffers

The global economic slowdown will translate into a higher number of insolvencies and therefore higher claims for trade credit insurers, according to Moody’s Ratings. But it added that the sector’s strong underwriting discipline makes it less vulnerable to shocks.

Corporate defaults continued to increase in early 2024, and Moody’s said that although it expects the default rate to decline slightly this year, it will do so only gradually, remaining close to the long-term average for a prolonged period. As a result, credit insurance claims will increase, together with the sector’s loss ratios.

After a long period of strong annual premium growth – around 10% per annum between 2020 and the first half of 2023 – the dynamics of the credit insurance market changed significantly in the second half of 2023, said Moody’s. The largest players reported on aggregate a modest growth in premiums, and several reported a decline, reflecting a slowdown in the global economy and consequently lower trade volumes, and to a lesser extent weaker pricing

As for pricing, the sector reported price decreases of just 2% or less in 2023, with signs of stabilisation at the end of the year, while combined ratios remain historically good, says Moody’s.

“At the same time, retention rates remain very high for most players, suggesting that competitive pressure is mild. We believe this benign picture reflects credit insurers’ accommodation of a rapid increase in demand for coverage from their existing clients as trade volumes recovered after the pandemic. This led to an increase in the sector’s covered exposure,” said the ratings agency.

Moody’s expects the sector to withstand higher claims thanks to strong financial buffers. “Insurers have taken advantage of moderate claims volumes in recent years to increase the buffers in their reserves. These buffers could now be used to offset a potential increase in claims,” it said. It also noted that the industry’s capitalisation is strong, and credit insurers renewed their reinsurance protection for 2024 at similar conditions to last year, further supporting the industry’s capacity to withstand higher claims.