Trade credit insurers more cautious as losses begin to rise: Marsh

The frequency and severity of global insolvencies have yet to reach their peak, with a significant economic slowdown expected in the second half of this year and 2024 “definitely” triggering more losses for insurers, said Marsh’s trade credit experts.

In a media briefing on the current state of the trade credit insurance market, Marsh’s Tim Smith said severity of loss is difficult to predict but “torpedo” scale losses threaten the most harm to the market.

With most regions now seeing the level of insolvencies starting to rise, Smith said trade credit underwriters are more cautious as losses begin to climb. But the Marsh experts said the trade credit market remains fairly positive for buyers. However, they called for more capacity.

“The sheer number of losses over the past few months has been rising considerably and since Q2 2022 the number has risen on a week-by-week basis,” Smith said. He explained that the numbers are “very close” to pre-pandemic levels in 2019 and could go higher.

“We are starting to see frequency really begin to ramp up and over the first quarter of 2023 this has accelerated. We expect the number of losses to increase, and increase beyond 2019 levels. We expect the second half of 2023 to continue on that trajectory,” said Smith, who is global practice leader for trade credit at Marsh.

He added that Europe has already seen significant losses in markets such as Poland, Spain and Portugal. The UK also has a high numbers of insolvencies but the values remain low, he added.

“Insurers recognise they need to support growth but they are now reconsidering their risk approach,” Smith said. “They fear the second half of 2023 will see some increase in risk and therefore they are monitoring the levels of cover they are writing.”

Smith wants more capacity for trade credit risks, despite the fact that some new entrants have already taken on risks over the past 12 to 18 months, including three or four carriers in Europe and North America.

“The market needs more capacity, undoubtedly. The penetration rates of trade credit globally are really quite low. Penetration rates dictate pricing and models for insurers,” Smith explained. New insurers also bring product and policy innovation, Smith said.

Marsh said that energy prices and rising inflation have created more risk for businesses already under pressure post-pandemic. “We have some major corporates globally taking decisions on their future production: Is it worth keeping plants open, is it too expensive through energy costs to keep them fully open and, if so, what does that mean for the supply chain?” Smith said.

The trade credit insurance market incurred one large torpedo loss in the past 18 months from Brazilian retailer Lojas Americanos. The company filed for bankruptcy in January 2023 and is expected to rack up hundreds of millions of dollars in financial losses to suppliers and, eventually insurers, Smith said.

The good news for buyers is that Graham Bristow, Marsh’s UK trade credit practice leader, said trade credit rates are now at their lowest for UK buyers in ten or 12 years.

“Pricing has come down over the last few years,” he said, “certainly since the last financial crash in 2008/9.” And although insolvencies and claims activity are both trending upwards in the UK, Bristow said there is still a “tremendous” risk appetite from the market.

“Coverage levels across the UK market are north of where they were pre-pandemic,” Bristow said.

Government support for the trade credit sector during the pandemic, and the heightened risk of insolvency, has helped raise the profile of trade credit insurance, Bristow said.

“The UK market has learnt a lot of lessons since the 2008/9 financial crisis”, when many underwriters quickly put up prices and reduced cover, Bristow said.

He said the market has recognised that businesses want certainty and large numbers of UK credit insurers now offer guaranteed credit limits. Non-cancellable cover globally and in the UK offers much-needed assurance to buyers, the Marsh expert said.

Bristow said trade credit insurance was traditionally bought over fears of loss. “Now there is more harmony in the product range,” he said, with companies buying trade credit insurance to secure additional financing, funding and credit management support.

“More than half of our enquiries over the past year were based on funding/financing across all sectors. Trade credit insurance has become a methodology to secure additional funding,” Bristow said.

Smith said the trade credit insurance market is strong overall. “It is growing and very positive. Losses are starting to increase, but severity will be the unpredictable part,” he warned.