Political, credit and security cover buyers can expect softening market in 2012—JLT

In its latest report on this market it states that premium income for the market is flat, though underwriters still benefit from instalment income from multi-year policies that will act as a 'cushion'. Also the broker notes that higher rates driven by the stressed circumstances seen in recent times should offset lower rates and volumes for underwriters for now. But JLT points out that this will not be enough to prevent a softening market.hide"Global uncertainties are feeding into depressed volumes of trade, with the knock-on effect that the volume of business into the insurance market is reduced. This, combined with the increase in underwriter capacity since the crisis, means that we should be entering an insured-friendly environment, as the market has the potential to become soft. How disciplined underwriters will be in their willingness to support soft structures is unclear," stated the broker in the report. It believes that the troubled wider economic environment means that the political risk and trade credit market will become 'highly competitive' and it will be a challenge for underwriters to fend off competition. JLT also noted that, as about 50% of premium in the CPS market comes from banks that are being 'squeezed' on the funding side, their ability to deliver premiums for underwriters will come under pressure. The looming requirements of Basel III, the international banking sector's latest capital adequacy regime set by the Bank for International Settlements, will further exacerbate the challenges that face the banking sector. "Banks are already looking to sell down their assets to boost their equity positions. This will have a massive impact on the volume of trade finance business. Banks have lobbied the Basel Committee to relax the restrictions of trade finance transactions but the Committee have resisted thus far. This could change as the deadline approaches," notes JLT. The broker said that at the end of 2011 it appeared that many underwriters had either made their budgets or were managing expectations because of the heightened levels of macro-economic uncertainty. This was because the appetite among buyers for anything other than plain vanilla transactions was significantly reduced, said JLT. It add that, while underwriters feel that macro-economic market conditions should be driving up pricing in the lending / trade markets that they cover, this expectation is generally not yet being met. This is forcing underwriters to operate at a pricing level below which they believe it should currently stand to secure business, said the broker. JLT added that an 'ever increasing' number of lenders that face deepening liquidity cost issues has, in some specific cases, made it more cost efficient for them to use the syndication market rather than insurance. "Our view that syndication is not a reliable long-term replacement for insurance still holds, although the syndication market has shown an ability and appetite to absorb some users' requirements," it stated. The broker noted that some banks with liquidity and diminished risk appetite problems are actively selling down their assets (through loan portfolios for example). Those banks with high US dollar holdings, notably in the US, Japan and China, that are less constrained by liquidity problems, are buying-up these assets 'en masse'. "Early indications are that their appetite for risk retention is much lower than those initially holding the debt, which has seen a higher proportion insured in the market. One example of this has been Russian deals that have been sold off to Japanese buyers in particular, and then insured in bulk, which caused an acute shortage of Russian aggregate in the market at the end of 2011," stated JLT. The broker also said that the number of refinancings, premium reductions on medium- and longer-term business, slow down in global trade and lending and increased competition with the syndication market is causing underwriters 'real difficulties' as they try to forecast for 2012. "Underwriters are quite pessimistic and are forecasting contractions in their premium income earnings versus 2011. They are also forecasting a potentially higher number of claims given the heightened uncertainty in the current macro-economic landscape," stated JLT.

Political, credit and security cover buyers can expect softening market in 2012—JLT

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