The Big Question: How can insurers support business in the shadow of rising insolvencies? With Alexia Parmentier, Global Head of XoL, Allianz Trade

As the world emerges from the COVID pandemic, global firms have faced a series of shocks not only form the impact of COVID-related restrictions but also economic challenges and in recent times rising interest rates. a sharp rise in input prices, and a rapidly tightening financial environment.

Data from the UK Government’s insolvency service, for example, highlights that total insolvencies rose to 22,109 in 2022, their highest since the global financial crisis and up by 57% from a year earlier.

It means that the greatest number of companies in England and Wales fell into insolvency last year since 2009.

In March these corporate insolvencies increased by 37.7% to a total of 2,457 compared to February’s total of 1,784 and increased by 15.9% compared to March 2022’s figure of 2,120.  Corporate insolvencies increased by 145.9% from March 2021’s total of 999 and by 99.3% from March 2020’s total of 1,233.

The impact of business failure is far reaching and the growing concerns of businesses around the failure of clients which have provide a significant proposition of income has seen an uptick in the demand for trade credit covers and particularly for excess of loss (XoL) trade credit coverage as business plan for the loss of a major client. It has created new demand for those insurers which underwrite what is a specialist cover.

With this in mind, we spoke to Alexia Paermentier, Global Head of XoL, Allianz Trade, about the impact of the pandemic in the trade insurance sector for this week’s Big Question.Parmentier,

Ian Summers, Global Business Leader, AdvantageGo

“We have seen an artificially low claims environment for trade credit over the past two to three years,” Parmentier explains. “The pandemic saw state support systems put in place for companies so the impact was not felt as much as we might have expected. However, we are now seeing those state support scheme either ended or coming to an end, and while we have not seen many claims there are concerns as to the potential effects, given the broader recessionary effects.”

Parmentier says the companies which have taken out the excess of loss coverage continue to put a lot of thought into the performance of their clients and suppliers.

“Companies have been examining their clients and their suppliers  in order to  better understand them, rather than look to outsource the risk to their insurer. XoL cover is really for those catastrophe events which create loss which a business simply cannot afford to meet, which will jeapordise the balance sheet or may well impact the ability for the company to deliver on their two to five year strategy. It is partly a cap on what can be deemed to be unacceptable losses.”

She says that “we rely on the client’s credit management system and the information they can provide. As such we will look at the company’s credit management systems and performance rather than individual clients and the risks they pose. Since we began offering the cover, our XoL insureds clearly know their customers. However if they have a good credit management, they also know that any additional information they can access can be important.”

Parmentier adds that while the insurer will work with its trade credit client to source information which can assist in assessing the risks, its XoL clients are now also looking to their insurer for more support: “We are finding that we are having conversations with our XoL insureds over the information we can also provide to help with their credit management.”

Singapore

The issues facing businesses on the trade credit front, while similar, are different depending on geography. Parmentier says that in Singapore the Russian invasion of Ukraine is not seen as a major issue, with Asian companies more concerned with the threat posed by political instability around Taiwan and Hong Kong. Ukraine is also not high on the list of concerns for US companies.

“In the UK the issue remains complex,” she adds. “When the COVID restrictions were lifted we saw a natural euphoria and a rise in travel. That has not subsided yet but the costs of energy have impacted travel and energy prices have also increased the pressure in the cost of living which is having an impact on non-food retail businesses. The construction sector has been hit by rising interest rates with a reduction in people looking to renovate their homes or looking to move.”

International markets

Parmentier explains that in the markets in which trade insurance already had a high penetration rate such as the UK, Germany, and France, there has been not real uptick in demand. Nonetheless, Allianz Trade has increased its physical XoL presence in Germany, Spain, Singapore and Brazil. Parmentier says the move is in response to a need to be closer to the clients in the current climate.

 “We are seeing a rise in demand in the US, APAC, Brazil, and in Brazil we have seen the first major unexpected insolvency,” she adds, stressing that the XoL covers rely on the insured’s credit management:

“We have a very stable risk stance. If we have a concerned about an individual risk, we will call the client to discuss it. They may say that the client is of such importance to the business they are keen to continue the relationship. The chances are we will land in the same space. The insurer will have the same logic and we are aligned with the client.”

Parmentier says that the underwriting approach is on a case by case basis. “We will ask what they do to prevent themselves losing month from insolvencies?”

“Clients have questions and concerns which require having a physical presence in the key markets,” she adds. “The increase in the request for support around the information our insureds required to deliver effective credit management have necessitated a response.”