Claims are Coming: Insights from Berne Union Data and Research

Berne Union Economic Research Analyst, Jonathan Skovbro Steenberg explores trends in demand for cover and claims, based on data from the Berne Union Business Confidence Index, and reported industry data for 2020 FY
Jonathan Skovbro Steenberg
Jonathan Skovbro Steenberg
Economic Research Analyst, Berne Union
22/03/2021

The popular TV series Game of Thrones made the phrase Winter is coming infamous. In this fantasy world of irregular seasons, this expression reminds inhabitants that no matter how sunny or calm the present may seem, winter will always arrive sooner or later, and one must be ready for it. The export credit insurance industry has a similar mentality, especially in chaotic times such as the COVID pandemic. As export credit insurers emphasised in the recent Berne Union business Confidence Index (BUCI) survey, they are balancing their risk appetite as they are expecting increasing claims along with an expanded demand for cover going into 2021.

Persistent demand for cover

For both Short Term (ST) and Medium/Long Term (MLT) commercial and/or political risk, export credit insurers saw an increase in demand in the last quarter of 2020 compared to the preceding quarter. This tendency was stronger for ST than for MLT as several providers of MLT noted that larger projects had been cancelled or postponed due to COVID. Tentative observations from Berne Union members’ business data equally indicate that ST business as a whole plateaued or even increased slightly in 2020 compared to the preceding year. New MLT business, however, suffered a drop of almost a quarter in 2020 with volumes in the latter half of the year looking significantly lower than the second half of 2019.

These observations are consistent with broader macro trends seen in 2020 where merchandise trade declined sharply before executing a swift recovery in the latter half of the year, while cross-border investments saw a similarly big fall but a much slower recovery. As seen in the figures below, merchandise trade in OECD and BRIICS countries only fell be 8 % in 2020 while global foreign direct investments (FDI) fell by 29 % in the first nine months of 2020 compared to the same period in 2019.

Source: OECD statistics
Source: OECD statistic

The observed changes in commitments for ST and MLT were both lower than the overall drops in merchandise trade and FDI, respectively. While these cannot be compared one-to-one, they are connected and highly correlated. However, export credit and investment insurance have an interesting feature during period of distress: While the overall volume of business to insure usually takes a sharp dip during a crisis as exports fall and investment are put on hold (dark blue column), exporters and investors also become more aware of potential risks resulting in a higher demand to insure the remaining volumes (green column). If the higher risk perception results in a higher take-up of cover than the drop in volume, one can, for example, see an increase in ST commitments even when overall merchandise trade has fallen in the same period. In the latest BUCI, some export credit insurers noted increasing risk perception as a potential driver of increased demand going forward.

Lower emerging claims concludes 2020

Export credit insurers saw a lower volume of ST emerging claims in Q4 of 2020 compared to Q3, while MLT emerging claims were slightly lower to unchanged. Many insurers noted that pre-claims or emerging claims related to COVID had not materialised to the degree they had expected, while a few insurers mentioned that COVID-related emerging claims had been increasing toward the end of the year. Provisional conclusions from Berne Union members’ business data show similar trends as seen in demand: ST business had an easier year than MLT as claims paid (only) increased around 10 % in 2020 compared to 2019. Claims for MLT business were at a low level in 2019 and this also contributed to the volume of claims increasing by a whopping almost 50 % in 2020, with these mainly materialising in the second half of the year.

While COVID has devasted several industries and exposed numerous untenable corporations as seen in newspaper headlines over the past year, the anticipated consequence of mass bankruptcies and exploding non-performing loans (NPLs) have not seriously materialised yet. Generous government support and revised bankruptcy laws delaying bankruptcy proceedings have stopped or postponed emerging bankruptcies, which have been falling significantly in Advanced Economies. Contrary to expectations (Euler Hermes and Atradius forecasted insolvencies to increase by 17 and 26 % in 2020, respectively), bankruptcies dropped by 27 % from January to April 2020 and generally stayed at a low level for the remainder of the year.

The crystal ball foresees claims

Going into 2021, the big question is how many bankruptcies were avoided and how many simply were delayed. Generally, export credit insurers are expecting to see COVID-related claims increase going into the first quarter of 2021, and several noted that many more claims will materialise even later on in the year according to the latest BUCI. The light blue area in Figure 3 between the predicted[1] and actual bankruptcies should illustrate the normal number of bankruptcies which did not occur due to COVID-related support measures. These mainly include non-cyclical bankruptcies which occur every year (companies going under due to bad management, poor financial performance, change in consumer habits, new competition etc.), the majority of which will emerge once government support measures are phased out, materialising along with the cyclical COVID-related bankruptcies, whereafter the bulk of claims will follow.

Note: Overall bankruptcies index (Jan-2019=100) is a weighted average of Asia-Pacific (Japan, Republic of Korea, Singapore, Hong Kong, Taiwan, Australia), Americas (USA, Canada, Brazil, Chile) and EMEA (Germany, United Kingdom, France, Turkey, South Africa).

Optimism for 2021 can shine through the gloomy clouds as new export orders for manufacturing have been expanding for six months straight (September 2020 to February 2021) according to J.P. Morgan Global Composite PMI, and GDP and merchandise trade are expected to perform a tremendous comeback in 2021 and 2022. Equally, continuous post-COVID fiscal support by governments along with relatively low yield on borrowing can ceteris paribus keep bankruptcies at a lower level. While 2020 ended up being the year of suspense for insurers, 2021 appears to be the year of resolution.


[1] A simple statistical forecast from February 2020 on assuming that 2020 would be a “normal” year.

More BUlletin Publications

January 2020 BUlletin

09/01/2020

Exploring the macro forces impacting trade, 2019 H1 Industry Data Snapshot + Analysis of the Economic Outlook for 2020

September 2019 BUlletin

17/09/2019

This edition of the BUlletin juxtaposes themes of change and disorder with the celebration of a number of institutional anniversaries, symbolic of endurance.

• The new dynamics of 'trade in flux' • 100 years of UKEF • ICIEC on Partnerships for Development • Sector Spotlight: Shipping (GIEK) and Pharma (SE...

July 2019 BUlletin

31/07/2019

Export Credit and Investment Insurance, Today and Tomorrow

We can see the seeds of the future in digitalisation, automation, applications of block-chain, or machine learning. But what will it mean in practice?

May 2019 BUlletin

24/05/2019

Is international financing on target?

This edition of the BUlletin addresses the evolving role of various international financial institutions in generating sufficient risk capital for development projects and in particular investment in critical infrastructure and renewable energy.

Also featuring review of Bern...

2019 Spring Periodical

11/04/2019

Spring Periodical with 2018 Year end statistics and commentary, plus results of the 2019 'State of the Industry Survey', conducted jointly with ICISA.

Berne Union Members covered a record USD 2.48 trillion of new business in 2018. At the same time, claims remained elevated at over USD 6 billion, for the forth consecutive year....

August 2018 BUlletin

31/08/2018

Innovations in trade technology, e-commerce and insuretech | Rethinking local currency | LMA's new buyer credit facility 

Contributors this month explore diverse themes of innovation, from the foundations of trade in the form of smart ledgers through to new approaches to supporting e-commerce exports and the potential...

July 2018 BUlletin

17/07/2018

IWG | 2H 2018 Risk Outlook | Trade Wars | Regulation and more...

Contributors to the July BUlletin explore the development of a new era in export credit, through the lens of proceedings at the IWG; trade wars; sustainability and export finance regulation

April 2018 BUlletin

27/04/2018

Themes for this month focus on:

Linking Trade and Economic Growth / Collaborative approaches to Sustainable Development /Wind Financing / Digital Innovation / Venezuela / 

March 2018 Bulletin

21/03/2018

By all accounts 2017 was an excellent year for Berne Union members

who once again made a tremendous positive impact on global cross-border trade and investment - providing a record USD 2.35 trillion in cover for cross-border trade and investment and now supporting 14% of total worldwide exports.

September 2017 BUlletin

02/10/2017

"small business to big infrastructure – local currency to global economic policy"

Themes for September span the full scale of international finance in a bumper edition, with a selection of 12 articles from Berne Union members and industry experts, painting a telling picture of the relative pressures and priorities in ...

August 2017 BUlletin

04/09/2017

"New Horizons: Changing Markets, Evolving Approaches"

This month’s contributors examine three economies seemingly at turning points – Argentina, Iran and the Côte d’Ivoire – considering in each case the forces actively influencing the trade environment and the approach of the financial ...

July 2017 BUlletin

24/07/2017

"10 years of SERV, SMEs and Africa"

Commentators this month focus on support for small businesses, local contractors and risk in Africa - including energy sector and analysis of the Mozambique debt crisis. Detailed BU Data Snapshot on Africa and a member survey on approaches to SMEs set the scene...

May 2017 BUlletin

12/05/2017

"Claims, Pricing and Regulation"

The first edition of the BUlletin kicks off with a 'State of the Industry' review from Berne Union Secretary General, Vinco David, where he considers three factors which could disrupt the status quo for the export credit and investment insurance industry...