There has been much criticism in the press about the reluctance of credit insurers to underwrite risks in times of distress and the outright cancellation of coverage. Rob Nijhout, the executive director of ICISA (International Credit Insurance & Surety Association) felt compelled to counter the current criticism.
The economic crisis has turned the spotlight on trade credit insurance and surety. The interest from journalists and politicians in particular underlines the important role the sector plays in making trade possible. The deteriorating economy has affected some sectors more than others and has overall lead to increased commercial risk and higher probability of default. While this inevitably results in changes in underwriting conditions, it appears that this has not always been understood by some or put into context.
Collectively trade credit insurers insure over 20 million companies at any given moment. Credit limits determine the insurer’s liability on each of these. Some commentators have focused on the hundreds of thousands of credit limits that have been lowered or cancelled by the industry since the start of the crisis. While the number of affected limits can be considered as large, one should realize that this is less than 5% of the total number of active credit limits. Thanks to a basic level of international trade, the drop in insured trade has been notably lower than the drop in GDP over the same period.
To assist vulnerable companies in obtaining adequate credit limits from the credit insurer, several countries, in and outside the European Union, have launched so-called support schemes. These have taken on different forms, ranging from top -up reinsurance guarantees to premium subsidies and tax relief for policyholders. Some schemes focus solely on export risks, while others affect domestic risks only. Most of the schemes are temporary. What these schemes have in common is that they aim to support the buyer or the policyholder; their goal is to increase insured trade between the two.
However, the differences between the many schemes can lead to an unlevel playing field, while the administrative burden for those using the schemes is sometimes cumbersome. It remains to be seen if the schemes are the best way for making companies they aim to help become healthy again. Direct help to the affected companies can be more effective than giving support indirectly through a credit insurance policy.
Members of ICISA remain solvent during this recession and stay committed: the insured exposure at the end of 2008 was 10% higher than at the end of 2007, in spite of the dramatic economic downturn in the last quarter of last year. The number of credit insurance claims increased sharply during 2008 in most markets.
For the coming period members of ICISA expect results to improve, albeit with sharp decreases in insured trade coupled with a downturn in premium volume. Source: Courtesy of ICISA