Stuart Ashworth, Head of Broking and Market Engagement, Financial Solutions, discusses the current market conditions for trade credit insurance, non-payment insurance and political risk insurance.
Financial Solutions market trends
Hear from our experts and learn more about the latest
insurance marketplace trends
Transcript:
Financial Solutions market trends
0:03
Welcome to WTW's Global Marketplace Insights series, where our
experts bring you the latest risk and insurance perspectives.
0:20
Hello, I'm Stuart Ashworth, the Head of Working and Market
Engagement for the Financial Solutions global line of business for
WTW.
0:29
Financial Solutions is really the umbrella organization that houses
a number of different product lines, notably trade credit
insurance, non payment insurance and political risk insurance.
0:41
And we thought it was worthwhile to explore these independently and
individually to see what's happening in the marketplace and
think about what the future may hold.
0:49
Turning to the first of our products Trade Credit insurance,
somewhat counter intuitively COVID actually saw a drop in the
number of trade credit claims, but the frequency of claims has been
ticking up recently and we now expected to get to pre COVID levels
pretty sure pretty soon.
1:05
Now that said the claims that have come in have not been too severe
with the exception of one large claim in Latin America.
1:13
So insurers continue to enjoy strong loss ratios. Ample capacity is
still available in the marketplace and many insurers who recruiting
talent which is a firm indication of the strength of the
marketplace.
1:28
However, we think credit appetite is likely to contract in the
second-half of 2023.
1:35
Booming weights have stabilized in most markets and we expect this
trend to continue for the next few months.
1:41
This is being driven by strong competition for both new and renewal
business, particularly in sectors which is seen as low risk such as
pharmaceuticals or the food and beverage industry, but conversely
industries which is seen as more challenging we're seeing a
slowdown appetite such as construction or retail.
2:07
Once the market remains steady for traditional whole turnover
insurance, we're seeing an increased demand for top up
cover.
2:14
This is where additional coverage is being bought over and above
what was being bought previously.
2:20
Now this has come about and been exacerbated by dual factors of an
increase in global trade coupled with high inflation, which means
that limits which were appropriate and sufficient six months ago
are insufficient now.
2:35
But it's worth noting that specialist insurers are stepping
into this marketplace and have responded by offering additional
cover and support.
2:45
Looking to give clients advice? Our advice would be to explore the
market and seek alternative indications at renewal.
2:51
The insurance appetite remains strong and competition is fierce,
which means there may be alternatives to your incumbent insurer and
it's always worth exploring.
2:59
Thinking about our next product line which is non payment insurance
for banks.
3:05
Over the last 20 years, the insurance market has provided a channel
large financial institutions to distribute risk.
3:14
Now financial institutions are particularly susceptible to
macroeconomic trends.
3:19
A current interest rate environment is impacting lending and bank
capital in different ways.
3:25
For example, some FIs who had modest manageable swap exposures and
that far more exposed to credit risk than they were previously and
therefore they're looking to lay this off into the insurance
market.
3:36
There's also been increased interest around new Basel capital
relief legislation and regulations which are being drafted and
implemented in the United States.
3:46
Project finance remains one of the most active areas that we see
and we expect that trend to continue, particularly given US
infrastructure investments.
3:56
We also expect this to continue in Latin America as a sweep of new
governments come into power looking to increase infrastructure
spending and across parts of Asia.
4:06
Turning to Asia, we've seen a slowdown in transactions from
China in light of wider economic challenges, but that's been
balanced by an uptick in transactions that we're seeing coming
out of India.
4:18
If we look at pricing, there is a geographical lens that we have to
apply to this.
4:24
Turning to pricing, there is a geographical lens we need to
apply.
4:41
Banks in the GB are fighting against market corrections which are
being suggested by the insurers.
4:47
This is because an increased competition in the lending space
looking for high quality investment grade assets.
4:54
If the bank's lending is cheaper, the insurance pricing has to
also be cheaper.
4:58
In the US, rising interest rates are causing tighter insurance
rates as it's hard for banks to significantly increase their
lending rates in the current climate, whereas Asia seems to be more
immune to these challenges.
5:11
Thinking about capacity, the insurance market is small when
compared to the lending sector that it supports and as such
capacity can be constrained on certain key markets.
5:21
Outside of those high demand countries, capacity remains strong and
we're seeing several new entrants come into the
marketplace.
5:29
More complex structures such as leverage finance attracting a
smaller percentage of insurers.
5:34
The demand is growing on the back of this increased demand.
5:38
We're seeing insurers reacting and increasing the supply
despite sovereign defaults and restructurings, the claims
environment also remains benign.
5:51
Now if you are approaching the insurance market for these
transactions, it is worth bearing in mind that capacity is finite
and it tends to be awarded on the first come, first served
basis.
6:01
Therefore, it's important to approach the market as early as
possible to avoid disappointment.
6:09
Finally, looking at political risk insurance.
6:12
Given the world around us, companies continue to have fears over
political risks, risk contagion and increased globalization.
6:20
Clients, who are increasingly using discussions, information
sharing and scenario analysis to measure their exposures. Recent
events and significant claims and notifications means that
reinsures and unnerves about losses and undue arts and nervous
about returns.
6:38
This means that insurers have tightened cover to satisfy
reinsurance requirements and raise the rates that they're
charging to ensure future profitability.
6:47
Whilst the capacity remains strong, appetite is constrained on
certain markets, which means more deals are being syndicated.
6:56
Geopolitical volatility has led to rate increases and rates are
significantly up and where they would have been 18 months ago.
7:03
But rate increases are not being applied uniformly across the board
and certain products are suffering more than others.
7:09
Multi-country policies, for example, have seen some of the sharpest
rate increases as they're deemed to have been under priced
compared to single situation policies.
7:19
In addition to their former ESG stances, the insurers have got
fairly consistent views that there are certain industries
they're pulling back from, thermal coal, oil sands, weapons and
tobacco top of the list of markets insurers are no longer looking
at.
7:51
Our placement advice to clients when looking at political risks
would be to ensure that all risks are correctly framed and
presented to the market in a considered and strategic way to ensure
that the risks get the best sounding and the widest possible
coverage.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.