European Debt Crisis Rattles Trade Credit Insurance Market

Although the overall trade credit insurance market remains stable, insurers have ceased underwriting new accounts and canceled credit limits on existing accounts with Greek exposures. The actions in Greece are an anomaly and are not expected to significantly impact the overall trade credit market.

Insurers are closely monitoring the situation in Europe as further economic troubles there could have a ripple effect on markets in other geographies. Should the crisis deepen, it appears that trade credit insurers and policyholders will be better prepared than during the last financial crisis.

Experts See Deterioration in Trade Credit Underwriting

Marsh’s global trade credit experts were asked whether insurers credit limit underwriting had improved, deteriorated, or remained the same over the past three months.

All Eyes on Greece

Although trade credit insurance capacity remains available for most countries in southern Europe, insurers essentially have stopped covering new risks in Greece due to the country’s mounting debt issues. Many insurers with “cancelable” coverage also have exercised their options to cancel credit limits, especially on importer trade debt obligations. ??In response, Greek politicians have sought support for a European Union-backed export trade credit insurance program, similar to one in Germany, but any such effort will take time. Meanwhile, several government export credit agencies are supporting exports to Greece by select firms domiciled in their countries.

The withdrawal of trade credit underwriting capacity in Greece is disappointing, but there is a general acceptance that the country has become an uninsurable risk for private market insurers. Given its relatively small economy and trade credit exposure, the situation in Greece is not on its own expected to significantly impact the overall trade credit insurance market.

Of more concern to trade credit insurers is whether other countries—notably Spain and Italy—fall into similar debt crises. It is a fluid situation that must be monitored carefully. At the time of this writing, private market insurers were still issuing trade credit insurance policies in Spain and Italy, both on a portfolio and select risk basis, but typically were scrutinizing risks and requiring higher self-insured retentions.

They also are raising rates. According to Marsh benchmarking data, companies with meaningful exposures to customers in southern Europe typically experienced rate increases up to 30 percent in the second quarter of 2012, with those in Eastern Europe and Latin America experiencing the sharpest increases.

Sustainable Credit Limits

Should the European debt crisis worsen, it appears that insurers and policyholders will be better prepared than was the case during the 2008 global financial crisis. At that time, trade credit insurers were criticized for canceling large swaths of credit limits on customers that ultimately remained creditworthy.

In response, insurers generally changed their approaches to credit limit adjustments, relying on more up-to-date customer financial information, improving communications, providing more notice before cancelations, and engaging more with policyholders. The renewed focus on underwriting decisions could lead to credit limits being more sustainable should the European debt crisis escalate.

At the same time, many policyholders have improved their own credit risk management techniques and are retaining more risk. In addition, more policies now contain non-cancelable credit limits or limits with delayed cancelation. Such modifications allow policyholders to make more informed credit risk decisions and avoid being immediately impacted by adverse credit insurer actions.

European Banks Retreat

In addition to the withdrawal of capacity from Greece, the debt crisis and certain regulatory requirements have pressured European banks to slim down their balance sheets due to funding constraints and to shore up capital. As a result, European lenders, which historically have been at the forefront of international trade, have significantly curtailed or ceased financing trade for importers and exporters globally.

This shortage in trade financing affects the trade credit insurance market in two ways:

    •    Increased risk: Companies, especially those in the commodity sector, are forced to hold trade receivables on their balance sheets rather than sell the receivables to banks. This negatively impacts their financial viability and ability to access trade loans and increases the risk of nonpayment with their trading partners. Ultimately, this puts trade credit insurers’ portfolios at greater risk.
    •    Deal flow: European lenders historically were major purchasers of trade credit insurance, and insurers became accustomed to significant deal flow and premium volume from them. Asian and North American lenders are partially filling the trade financing void and are purchasing more credit insurance. Multinational corporations have increased their demand as they are now forced to take more trade risk on their balance sheets, despite the higher risk credit environment.

Conclusion

Despite the uncertainty caused by the European debt crisis, the trade credit insurance market generally remains strong and stable. Insurers continue to take a conservative stance when evaluating customer creditworthiness and are being careful with credit limit approvals. However, they are keeping pace with the increased demand and are deploying capital to protect companies’ accounts receivable—even those with meaningful exposure to southern European customers. ??To date, adverse actions from credit insurer have been limited to Greece and are not likely to impact the larger trade credit market. As a result, trade credit insurance remains a viable and valuable solution to help companies operate through unpredictable economic times and events, including, but not limited to those in southern Europe.