What could an age of economic uncertainty mean for trade credit insurance and surety?

The Swiss Re Institute and the Credit & Surety reinsurance team have launched a new publication, Credit & surety in the age of economic uncertainty. In this article, Martin Pfister, Head Credit & Surety Reinsurance at Swiss Re, shares his key insights and takeaways for primary insurers of these risks. Download a copy of the report.

It's difficult to find a word other than "uncertainty" to describe the global economic rollercoaster of the past years. The July economic outlook from the Swiss Re Institute reported that the end game remains a recessionary environment, though with country divergences.

We know the story that got us here.      

The pandemic drove global growth down, while governments around the world injected billions to support their economies. As the world began to emerge from lockdowns, the war in Ukraine drove supply chains into turmoil and sent inflation to levels not seen for decades. Central banks around the world raised interest rates in a bid to stabilise inflation, putting pressure on the economy whilst the effects of the pandemic crisis support are wearing off.

So, how did credit & surety overcome the recent economic turmoil, and what does an (or you might say "another") age of economic uncertainty mean for our industry?

I wanted to share some key takeaways and learnings for our insurance clients from our latest report from the Swiss Re Institute - Credit & surety in the age of economic uncertainty.

Trade credit insurance and surety play a vital role in enabling global economic activity. These insurance segments give confidence to businesses and public entities when they trade and invest, supporting the real economy. We estimate that trade credit insurance and surety covers generated combined global premiums of USD 33.4 billion in 2022. They represent about 1-2% of our estimated total Property & Casualty (P&C) insurance premium worldwide. Over the past 20 years, they have grown globally by about 5-6% annually on average, higher than the overall P&C market (~2%) and in line with average world gross domestic product (GDP) growth (5.5%).

Our last report on the state of the credit and surety market was in 2014, in the wake of the financial crisis. Since then, global penetration rates in trade credit insurance have eased slightly. The shares of premiums of the different regions remained relatively stable, after the rapid growth in China in the early 2000s. In surety, the development of a more heterogeneous product offering and of several key markets has supported the growth of the sector. Over the medium to long term, we anticipate that large investments in infrastructure projects should sustain growth in the sector, for example in the US and China.

Digitalisation is attracting increasing investment and is now embedded in the strategy of all large insurers. It enables more flexible insurance offerings, new ways of distributing the products and improvements to underwriting and risk management. However, while progress on AI has been rapid, distributed platforms have not reached critical mass and blockchain initiatives remain experimental. The focus remains on using technology to improve efficiency of insurers' internal processes, whilst leveraging digitalisation to increase penetration rates is still difficult. Digitalisation is also more challenging in markets with less flexible regulatory frameworks.

The past two economic downcycles have tested the resilience of trade credit insurance and surety underwriting. Over the past 50 years, the loss ratios in trade credit have displayed a strong correlation with global economic crises. However, during the Covid-19 pandemic, digitalisation, government support measures and state reinsurance schemes in Europe contributed to greater continuity in trade credit insurance covers than during the Global Financial Crisis. Broader economic measures such as fiscal and monetary support and temporary changes to bankruptcy laws also reduced insolvencies to historic lows, which reduced trade credit insurance loss ratios. In surety, there is no automatic link between the business cycle and surety loss ratios. Good underwriting discipline contributed to the avoidance of a surge in surety loss ratios during the Global Financial Crisis and government support prevented an increase in insolvencies in the construction sector during the Covid-19 crisis.

After two years at historically low levels, insolvencies increased in 2022, as government support and bankruptcy laws changes introduced during the Covid-19 pandemic were phased out. This is reinforced by the prolonged period of high inflation and weakness in manufacturing activity, and trade credit loss ratios are expected to return to historic correlation with GDP growth. Construction companies face rising material and energy prices, as well as wages to address shortages of skilled labor force. Inflation, high interest rates and ongoing supply chain tensions could lead to an increase in contract surety claims, as they push vulnerable contractors into financial distress. These factors also make it more difficult for sureties to complete construction projects or mitigate losses in case of a claim.

The credit and surety business is no stranger to uncertain environments and economic cycles. The roots of trade credit insurance stretch centuries, gaining popularity in the 19^th century with accelerations after the first Word War. The International Credit Insurance & Surety Association estimates that credit insurance covered EUR 6.35 trillion of shipments in 2020, representing 14.5% of world trade. The protection of construction projects through surety bonds was written into US federal legislation with the Heard Act in 1894.