The potential for increased insolvencies given the likelihood of a global recession amid the COVID-19 crisis, along with disruptions in complex global supply chains, are expected to lead to higher claims activity and pressure trade credit insurers’ profitability, according to a new AM Best commentary.
A new Best’s Commentary, titled, "Trade Credit Insurance: COVID-19 May Have Long-Term Implications," states that the short-tail nature of the trade credit product may partially offset the negative impacts, allowing for insurers to reprice and de-risk their portfolios, although incurred losses could be significant and involve costly litigation.
Depending on the level of insolvencies, and on the success of the mitigating actions taken by insurers, claims ratios could inch closer to the mid-to-high 80% levels seen during the financial crisis of 2008-2009 from the 45%-50% level achieved in the years after the crisis. AM Best expects trade credit insurance capacity to contract in the short term as insurers actively manage their risk exposures. Trade credit insurers can manage their exposures by setting specific conditions and credit levels or by reducing or withdrawing capacity to affected industries or geographies. Recent actions taken by governments and central banks will also help dampen the impact of the pandemic on trade credit insurers. Nonetheless, the potential impact on loss ratios remains subject to considerable uncertainty.
In the longer term, trade credit insurers will need to reconsider their pricing, limits, recovery rate assumptions and reinsurance strategies because of the pandemic. AM Best will continue to monitor the impact of the COVID-19 pandemic on the performance of its rated trade credit insurers.
To access the full copy of this commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=295814.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
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