The Insurers Who Cried 'Claims!'
Throughout 2020 a barrage of COVID-related claims seemed perpetually just round the corner, but ultimately remained conspicuously absent. Drawing from Berne Union data for 2020 and our 'business confidence' survey of industry sentiment, we look at how claims played out last year, and what we might expect in 2021
The ‘Boy who Cried “Wolf”’ is an allegory from Aesop’s fables that many could have been forgiven for applying to the export credit and investment insurance industry in the first months after COVID-19 when insurers have continually predicted a huge bulk of claims around the corner that, for many, did not materialise.
Looking at Berne Union data, last year did in fact end up being a year of high claims paid – with the total rising around 20%. However, that 20% rise stems from claims paid relating to medium/long-term (MLT) export credit and included many claims not directly related to COVID-19 but paid in 2020 incidentally. Short-term (ST) export credit insurers meanwhile, and perhaps surprisingly, reported a slight fall in claims in 2020.
Nonetheless, unmaterialised short-term claims and seemingly unrelated medium/long-term claims mean export credit insurers still fear claims to come. With much debt rescheduled or extended, zombie companies kept alive by revised insolvency legislation and government support and high debt levels for governments and companies alike, insurers have good reason to keep crying claims.
What actually happened in 2020?
When export credit insurers were asked about emerging claims and potential loss notifications at the outset of the COVID-19 pandemic, they almost unanimously foresaw an increase and most were at that point already handling a high volume of requests for rescheduling or restructuring of debt.
Unlike previous crises, new business rose for export credit insurers in 2020 as risk perception soared among exporters, while ECAs were given wider mandates to support their economies. Equally, in contrast to previous crises, ST claims did not rise significantly and immediately, while MLT claims, usually less sensitive to business cycles and crises, increased substantially.
Figure 1 displays the development of claims paid by Berne Union members from 2017 to 2020 as well as the implied Claims Ratio*. While an overall increase is clear, the cause is perhaps surprising – it is entirely driven by MLT claims, which rose by 44% in 2020 compared to the preceding year, while ST claims were essentially unchanged. The claims ratio for MLT, which had been stable in the past few years, increased markedly from 0.44% to 0.66%; the highest level since 2009 following the Global Financial Crisis (GFC). ST claims, which more than doubled in 2009 following the GFC, remained unchanged in 2020.
Figure 1: Claims paid and Claims Ratio for Export credit insurers from 2017-2020
With the objective to support businesses and households during the first and subsequent lockdowns, many governments, especially in developed economies, introduced furlough schemes, guaranteed loans and made favourable changes to business insolvency procedures which have ultimately kept people employed and halted corporate insolvencies throughout 2020. Corporate insolvencies and non-performing loans actually fell in many countries and regions across the world, explaining the absent rise in ST claims.
Similarly, while MLT claims have indeed shown a significant increase in 2020, the reasons behind this are nuanced, and not attributable purely to ‘COVID impact’. First of all, it should be noted that 2019 was a relatively low year for MLT claims paid, compared to the 5-year average; amplifying the apparent year on year increase through 2020. Secondly, a number of sizable MLT claims paid in 2020 relate to projects or transactions which were already problematic before COVID-19. Of course, some sectors directly affected by the pandemic, such as the airline industry, have seen claims increase in 2020, however not to the degree that one could expect, and other sectors are yet to see any rises in claims paid at all.
Distribution of claims paid
The export credit and investment insurance industry is a truly global one, covering trade and investment in all regions of the world, and despite the COVID-19 pandemic being equally global in scale, it has affected countries and regions differently. This is also reflected in the distribution of claims paid in 2020.
Latin America (LATAM) & Caribbean, Europe and North America were the three regions worst hit by COVID-19 in 2020 with all three regions reporting COVID-19 related death rates of over a 100 per 100,000 people. These three regions also saw the highest claims paid by export credit insurers in the last year (Figure 2) with more than $1.5 billion in LATAM & Caribbean and Europe. North America had claims paid of more than $1 billion in 2020. Every region, except for East Asia & Pacific (APAC) and the Middle East and North America (MENA), saw a higher volume of MLT claims than ST claims paid.
Figure 2: Claims paid by Export credit insurers in 2020 by region
Although the COVID-19 pandemic might appear to be the cause of high claims paid in LATAM & Caribbean, Figure 3 shows that claims ratios were also high in 2019. The MLT claims ratio was actually lower in 2020 than the previous year. LATAM & Caribbean has been dogged by economic and political turmoil in recent years and this continues to be the main driver of the high claims ratios. Europe – the largest destination for ST cover – shows much lower claims ratios, but a similar pattern, with the figure for MLT claims also dropping from 2019 – 2020. In contrast, North America did see a steep increase in the claims ratios for both ST and MLT, however a large share of these claims were related to projects transactions with pre-existing difficulties, exacerbated, but not caused by COVID-19.
Figure 3: Claim Ratio (%) by business line in 2019 and 2020 by region
While 2020 was a better year than many insurers feared, it was still a year that generally saw claims ratios increase compared to 2019, as Figure 3 shows. Sub-Saharan Africa (SSA) and MENA experienced an increase in the claims ratios for both ST and MLT with rising MLT claims paid across almost all sectors in SSA – a region that saw an exodus of foreign investment in 2020. A similar, although not as widespread, trend was seen in MENA where most sectors saw increases in claims paid.
Figure 4: Claims Paid & Ratio by Sector in 2020
The transportation sector was one of the hardest hit sectors in 2020 after borders were closed, flights were grounded, and business trips and holidays cancelled. It is no surprise that the sector experienced the highest volume of MLT claims paid in 2020 – over $1 billion – almost double the amount for the preceding year.
Export credit insurers exposed to the airline sector had a difficult year, despite being proactive and diligent with regards to processing requests for extensions and debt restructuring. The manufacturing sector equally had a tumultuous year in 2020 and it was the second largest sector for claims paid by insurers, in addition to having the highest claims ratio of specified sectors – see Figure 4.
MLT arrears (amounts overdue for payment) similarly increased in 2020: Up 7% in the first half of the year, followed by an additional increase in the latter half of 2020 and resulting in MLT arrears being 10% higher at end-2020 compared to end-2019.
Rising arrears is an indication that claims are still to come given that these arrears must either be paid late, materialise as claims or be rescheduled. Underwriters were faced with many requests for extensions of debt payments or debt rescheduling in 2020, including for both corporate and sovereign obligors and managed either bilaterally or through the Debt Service Sustainability Initiative (DSSI) initiated by the Paris Club, G20, World Bank and the IMF in early 2020 – a further indication that claims paid alone do not give a true impression of the risk situation.
Claims in the new decade
The first months of 2021 felt like a continuation of 2020 as lockdown measures were reintroduced, borders limited, and business had to continue operating in the world of restrictions and remote working. Export credit insurers also had to accept that the first quarter of 2021 was an extension of the status quo regarding emerging claims and claims paid.
While no crisis is the same, it is still interesting to learn from what happened during the last great crises. One interesting difference between the COVID-19 crisis and the GFC is that in 2008 public providers (ECAs and multilaterals) faced an immediate increase in ST claims as well as seeing claims materialise to a higher degree than their private counterparts.
The business of Public providers, especially with respect to ST credit, is markedly different than that of their private counterparts, focused on market gaps, including SMEs, riskier markets and other ‘non-marketable’ risks. SMEs generally have weaker balance sheets than large multinational corporations, meaning that they would need financing earlier during a crisis and have a more difficult time obtaining it which can result in a larger share of SMEs going bankrupt in the early stages of a crisis.
Figure 5: ST claims ratio by provider after crises
In the first half-year after the GFC, public providers were already seeing their ST claims ratios increasing by half, and after a year-and-a-half it had almost quadrupled. Meanwhile, the ST claims ratio of private insurers was roughly unchanged through 2008 but started increasing rapidly and almost tripled in the following year – as shown in the dotted lines in Figure 5.
The current crisis has shown very different dynamics (Figure 5 unbroken lines) as both private and public insurers saw a lower level of ST claim ratios in the latter half of 2020 compared to the pre-pandemic level in the latter half of 2019. Private insurers even saw a significant drop in the first half of 2020 when lockdowns were at their peak.
Private insurers’ expectation for ST claims in the first half of 2021 has been mixed. Initially they expected increasing claims paid in the first three months followed by a decrease in the second quarter of 2021 in anticipation of a rebounding economy and a prolongation of government. However, insurers now fear the bulk of bankruptcies will emerge in the second half of 2021 and 2022 once government support measures are phased out. Some private insurers note that they mainly have larger corporate clients who are better positioned to weather the storm and have had time to minimise their exposure to very vulnerable sectors, resulting in their current portfolios not being as sensitive to an eventual phase out. Some also expect the claims cycle has been elongated due to the support measures, suggesting that COVID-19 related claims may gradually emerge over several years going forward.
Public providers, on the other hand, had their mandates widened in 2020 to support businesses more broadly, including those industries most severely impacted by COVID-19. Being more exposed to these industries, SMEs and more vulnerable risks in general may be the reason why public providers continue to expect increasing ST claims in both quarters of the first half of 2021 as well as going forward. More and earlier claims paid by public providers will echo the trend seen after the GFC.
Figure 6: MLT claims ratio by provider after crises
MLT export credit has historically been less vulnerable to business cycles and often exhibits a lag before claims begin emerging following a crisis. During the GFC, the MLT claims ratio only started increasing drastically after a year-and-a-half, when it suddenly jumped to levels that were almost four times higher than pre-crisis levels.
However, the COVID-19 crisis once again proved different as public providers saw their MLT claims increase immediately and continue to rise in the latter half of 2020, resulting in an MLT claims ratio almost twice as high as the pre-pandemic level in last half of 2019. If – as seems to be the case – this initial increase in the MLT claims ratio for public providers does not relate primarily to COVID-19, then assuming a similar pattern of delay between cause and claims as during the GFC, then 2021 may well continue the prevailing trend of rapidly increasing MLT claims.
Private insurers, on the other hand, have not seen a significant materialisation of claims in 2020 and their MLT claims ratio was roughly unchanged – similar to what happened after the GFC.
Both private and public insurers continue to expect claims paid to increase in the first half of 2021, supported by the development of increasing MLT arrears seen throughout 2020, with several insurers mentioning that the airline industry continues to be distressed. Generally, export credit insurers are worried about an uneven recovery among different regions and countries which, together with an increase in debt levels, could result in claims paid in several countries as a knock-on impact of sovereign defaults and corporate bankruptcies.
Looking forward, an important question is what will happen with the large amounts of rescheduled and restructured debt?
Data collected for our rolling ‘business confidence index’ indicates that while emerging claims were generally falling in the beginning of 2021, the trend of requests to extend or reschedule debt has continued and underlines that some borrowers continue to struggle in 2021. Flexibility and careful management of this by both insurers and lenders should mean that only a small number of these situations will ultimately progress to claims, but at the same time we need to be cautious that we avoid kicking the can down the road indefinitely.
The DSSI has been extended and continues in 2021 and a Common Framework for Debt Treatments to facilitate timely and orderly debt treatment for DSSI-eligible countries already has three participants. Financial markets generally received the DSSI well, viewing it as a measure to manage liquidity, rather than solvency. A big question going forward is how long debt can be postponed or rescheduled and how the Common Framework, which is more focused on debt sustainability, will be received by financial markets.