The credit and political risk insurance industry is in a state of rude health. We have more choice of suppliers; more diversity of product; more attractive pricing (from the customers’ perspective); better loss ratios; and more people working in the industry, than ever before. New capital and new insurers are continuing to pile in and judging by the good returns of the industry over the past fifteen years, this is understandable. There is little doubt that all new entrants are very welcome and will have a positive impact on the health of the market overall.
Why Trade Credit Insurers Have Thrived Since 2010
One of the core reasons for this happy situation is that we have not had a year with a terrible loss ratio (overall) during the past fifteen years. Of course, there has been no shortage of crises, including the Euro crisis, Grexit, Brexit, Covid, Russia/Ukraine and Ghana. But while there have been some spots of claims (notably Russia/Ukraine and Ghana), these have impacted only a handful of underwriters, and have not caused a market wide problem in the way that the 2008 crisis did. Nor have any of these events created a real ‘hard market’.
One long term market participant described the situation to me as ‘fifteen years of plain sailing’, and that got me thinking. To have fifteen years, since 2010, without a really bad year (for loss ratio) seems unusual from a historical point of view. For example, look at the fifteen years before 2010, starting in 1995 – the market faced sudden crisis across South East Asia in 1997, Russia in 1998, Argentina in 2001, a ‘dot com’ crash combined with the 9/11 aftermath in 2002 and the great financial crisis in 2008. These events tended to affect loss ratios across the board, and created a hard market in a way that has not happened since. Why then, did we sail through the most recent fifteen years more smoothly, when the past was so choppy?
Smarter Underwriting or Government Backstops?
One explanation is that the quality of underwriting has improved. This is especially the case in the single risk/structured credit market. Risk controls and access to information in this part of the market are far superior to the situation of 25 years ago. But in the whole turnover world too, (where controls and training were already well developed by the year 2000), the risk tools and quality of information have improved yet further.
Another explanation is the recent tendency of governments to intervene in order to protect their economies from distress. We saw this firstly in the aftermath of the great financial crisis of 2008, but also during the Euro crisis, Brexit, then during Covid, and again when energy prices spiked at the onset of the Ukraine war. These interventions have prevented a sudden rush of insolvencies and have helped protect the balance sheets of financial institutions – not only banks but credit insurers too.
However, such interventions are not without controversy. They grow the debt of countries and the balance sheets of central banks. Ultimately, the rescues are funded by the taxpayer. Some would say they have created moral hazard, as financial institutions are allowed to keep the upside of the good times, but don’t have to suffer the downside of the bad times. Others complain at ordinary taxpayers having to bail out rich bankers and insurers at a time of growing inequality. Others might respond that governments have genuinely become better at managing the economic cycle, so that ‘boom and bust’ is actually over.
What Happens When the Next Storm Arrives?
Fifteen years of plain sailing does create some problems for us. Any downturn, while unpleasant, also cleanses the market, resets prices and improves policy wordings. As underwriters, we only really learn when things go badly wrong. Fifteen years is a long time to live without a major cleansing experience, and without a hard market. Many of the people who were key decision makers in the 1995 to 2010 period are retiring. Some of the main decision makers of today have not yet experienced a true loss ratio crisis across the board, or a hard market. High loss ratios occur when the intense commercial pressure to make premium over rules the voices of the more risk averse people. After fifteen years of plain sailing, it is perhaps harder than ever for voices of the risk cautious people to cut through.
The risk outlook always stays uncertain, and today’s world certainly continues to be so. Will our market continue to progress, to grow and diversify? Will it continue to sail through the next crisis in elegant calm? Can we expect that our economies will be protected by governments again next time? Is our risk management so good now that loss ratios will stay healthy for ever?
Only time will tell.
In the meantime, let’s celebrate the hard work of many very smart people who have progressed the market so far over the past fifteen years!
