EIOPA published the most recent update to its Financial Stability Report on the European insurance sector on 6 July 2021. The report provides a twice-yearly view of macro-economic impacts on the insurance sector, as well as industry trends from a financial stability and systemic risk perspective.
Given the current situation, the report focuses on the macro-economic impact of the Covid-19 pandemic on European insurers. It also considers the wider context of underwriting profitability, catastrophe trends, climate risk, digitalisation and the interconnectedness of insurance and the banking system within the paper.
As part of their analysis, the authors highlighted the experience of the trade credit insurance (TCI) sector during the pandemic. They discussed the introduction of government measures to maintain the availability of TCI coverage during the pandemic and also the wider impact of state intervention in reducing the occurrence of insolvencies. They focus on credit insurance as an example from the “perspective of both the prospects of increasing risk for the sector, …[as well as] the behaviour of trade credit insurers under the condition of rising risk”.
The authors note that claims did not increase relative to premium in 2020 and that this is in line with insolvencies in Europe during that period. However, they also point to the temporary nature of public support and the potential for increasing claims as those measures are unwound. While acknowledging the significant uncertainty with predicting how the pandemic will progress, they note their expectation that claims may rise in 2021 in response to changing government policy.
While pointing to historical data from ICISA of market performance, including during the Global Financial Crisis, the authors conclude: “Business survey results also indicate that claim [sic] growth may come with a time lag. After the pandemic hit, the number of invoices that are paid late increased from 27% to 47%. At the same time, the number of invoices written-off as uncollectible decreased from 13% to 7%. Under the assumption that a share of late payments will never be paid, one can expect an increase in claims in 2021 or later.”
The authors then look towards the possible behaviour of trade credit insurers under these conditions. Their initial comment on this topic that, “When the outlook darkens, insurers reduce their risk exposure”, is somewhat ambiguous. As an industry tasked with quantifying risk, insurers will respond appropriately and prudently to changes in the risk environment – both positive and negative. However, the authors note that the careful management of exposure at this time has meant that “…insurers [have] had plenty of time to adjust their underwriting processes and risk exposures to the new environment.” This echoes the quick recovery in capacity and appetite for new business reported in the sector after an initial period of adjustment early in the pandemic.
From the end of June 2021, the majority of credit insurance schemes that were put in place during the pandemic in the EU (and elsewhere, such as the UK) came to a close. This was in part, because markets were in a position where returning to normal functioning was both possible and desirable. Indeed, the rejection by a number of players of a proposal in Austria to introduce such a scheme to only begin in June also reflects this.
Wider economic support is also likely to be wound down if the infection rates maintain a downward trajectory and vaccination programmes accelerate. However, the report’s authors also note that, “…As long as the pandemic is not fully overcome, governments may be inclined to extend support measures for businesses, given the risks to the real economy. If economic development normalizes, then claims in trade credit insurance will remain low. If economic development deteriorates, then business support measures could be extended, preventing a potential increase in losses”.
The authors suggest that the impact and experience of the pandemic could lead to significant changes in the availability of credit insurance due to related changes in “…the perception, modelling, and underwriting of trade credit risks” caused by the pandemic. They go on to suggest that this possible change in perception could mean that “…business models that rely on physical contact…could be persistently viewed as higher-risk than was thought before the Covid-19 pandemic. This could lead to permanently lower coverage in these sectors.”
The unique experience of the pandemic and lockdown will naturally be reflected in the risk models of insurers, as one would expect with any major event such as this. The risk models used by credit insurers are dynamic and should provide a realistic reflection of the environment – whether good or bad. Supervisors will also expect insurers to appropriately reflect the impact of real world events. However, regardless of changes in risk modelling, the core of credit insurance underwriting will remain focused on the assessment of the credit-worthiness of individual buyers above other elements, including industry profile or economic outlook.
Overall, the report from EIOPA provides a balanced assessment of the impacts of the pandemic on the wider insurance sector at an unpredictable time. The experience from our members throughout this period has shown how resilient the sector is thanks to careful management and prudent decision-making. Importantly, the historical record has shown there is no evidence of long-lasting effects of large scale economic events on the availability of credit insurance, even in sectors more profoundly affected by such events. While the pandemic has been unique in many ways, there is no reason to believe it will be different in this respect as economies rebound over time.
ICISA has engaged with a number of stakeholders across the European Union on financial stability matters stemming from the pandemic, including EIOPA. Maintaining open and constructive channels of communication with supervisors and policymakers will ensure they are better informed about the industry, as well as being able to share key insights from our members about major events, such as the ongoing pandemic, with key stakeholders. We look forward to continuing these discussions in the future.