Credit & Political Risks
A resilient market despite challenging environment
Insurers show strong interest in both credit and contract frustration risks despite a challenging global economic environment with high interest rates and inflation. In addition, a troubling geopolitical landscape means corporations are also aware of their exposure to political risk. This is resulting in a high demand for risk cover in a number of emerging market jurisdictions prone to either a government interference or where there is a potential for regional conflict. China and Chinese-related risks are a particular concern for a number of corporates.
Underwriting changes
We have seen an increased level of appetite from Lloyd’s syndicates for well-rated credit risks, in particular for non-trade transactions originated from financial institutions. This is due to the relaxation of some Lloyd’s rules and guidance around writing ‘non-trade’ related risks that were previously out of scope for several syndicates.
Following Lloyd's being upgraded to AA- (S&P), as well as certain policy structures being eligible for CRR Capital Relief, there is much more appetite from financial institutions to use these insurance policies for both risk mitigation risk and capital relief purposes.
With respect to new carriers:
- Applied Credit is set to commence writing business in September 2024 with a significant capability of USD 60m for “any one risk”
- Africa Specialty Risks has a new capability in Lloyd's which improves their attractiveness to insureds given past paper was A- and even BBB+ with S&P
- Dan Riordan has recently left Vantage and set up MSIG USA providing further capacity in conjunction with MS Amlin.
We also see more activity on the multilateral side with Dhaman and ICIEC showing an increased level of interest in new business.
As has been the case for the last 3-4 years, insurers' senior management is increasingly moving the underwriting focus on risks higher up the credit curve which has left less capacity for more challenging credits in the single 'b' range. With reference to the demand already mentioned, there is also additional pressure from management to reduce direct and indirect exposure to China-related risks. This is resulting in risks in this jurisdiction or with a Chinese nexus being increasingly more challenging to place.
Many insurers are also no longer willing or able to take any risks with a Russian or Belarusian nexus in terms of risk location or the origin of certain goods being traded (which could be construed as 'self-sanctioning' rather than a consequence of regulations applied by OFAC, EU, UK or other applicable regulatory bodies)
Notable claims
Insurers have experienced more claims in certain jurisdictions partly due to the pressures of COVID, such as China, but also due to regional conflicts and the impact of sanctions following the Russia/Ukraine conflict. There has also been a certain number of defaults in Africa due to budgetary pressure (owing to higher interest rates), lower commodity prices and inflation which has affected imports, exports and infrastructure projects. Significant hard currency shortages have also led to long delays and defaults across the continent. The market has also experienced war losses in Ukraine following physical damage, as well as losses in Russia due to forced divestiture (driven by sanctions), confiscation of assets by the Russian government and non-payment for risks located in Russia due to sanctions (where banks have received payments in secured accounts but have been unable to release the funds to creditors).
Geographic/sector differences
Lower metals prices particularly in the battery metal space (e.g. nickel, lithium and cobalt) combined with inflationary pressures on costs, have made a number of mining risks much more challenging. There have been several defaults which are more commodity related, as opposed to being location specific, which was historically the main contributing factor associated with defaults in this sector. We have seen these problems across resource rich countries mainly located in Africa, South America and Australasia, as well as in China for reasons previously mentioned as well as lower refining margins and treatment charges. This has had a direct impact on availability of capacity and has pushed pricing up considerably given there are only a handful of insurers willing to consider new deals.
Outlook
Expected range in rate changes for the next 6 months for claims-free portfolios
Depending on the underlying credit risks, we feel rates have peaked and anticipate them to stabilise. As insurers are writing risks higher up the credit curve, they are increasingly competing for finite business and there is a downward pressure on pricing for names that are investment grade. Given lack of appetite for lower rated entities, rates may continue to rise but we are seeing some carriers feel the pressure of lower rates higher up the credit curve. We have also noted that given insurers' conservative stance on more challenging risks, some are behind on premium targets and are therefore starting to reconsider more challenging names, usually in relation to long-term key clients.
The Political and Credit Risks market is well established and has been through some very challenging times with the global credit crunch, Covid and Russia’s invasion of Ukraine to name just a few. The market will always look to capitalise on situations that give rise to the opportunity for increased rates and more stringent conditions, but insurers are also aware that they are in a long game and they need to ensure that well-established, well run insureds have long memories. We therefore do not expect seismic shifts in rates but rather that any changes in terms will be subtle and defendable.
Expected capacity change in the next 6 months for claims-free portfolios
Capacity remains strong for well rated entities but continues to wane in Africa, China and certain countries in South America where there has been increased government interference, delays in permitting and civil unrest/protest. There are numerous portals trying to tap into non-traditional capacity, whereby such entrants rely on the track record and expertise of the market. This said, such portals have so far failed to penetrate the market with clients and brokers remaining loyal to well established insurers.
Expected coverage change in the next 6 months for claims-free portfolios
We think the market has stabilised somewhat and do not anticipate any marked shifts in the next six months.
As has been the case for the last 3-4 years, insurers' senior management is increasingly moving the underwriting focus on risks higher up the credit curve which has left less capacity for more challenging credits in the single 'b' range.
Emerging risks
The China/Taiwan situation has raised eyebrows and has significantly affected appetite from insurers. Clients who continue to legitimately trade Russian cargoes need to be aware that appetite in the market to continue to cover trades is significantly reducing. There are major concerns with availability of hard currency across Africa and insurers are actively managing their portfolios to reduce such exposure.
Renewal recommendations
We would always recommend testing the market fully to ensure insurers and especially new entrants are not offering pricing and terms that are superior, but given the challenging global environment we would advise clients to continue to support those insurers that have been there throughout the credit events we have seen in recent years. We believe in market-wide syndication to ensure that customers are not too reliant on a handful of carriers given historical knee-jerk reactions from senior management that have led to the loss of numerous insurers.
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