SA credit insurers keep a close eye on eurozone developments

South African credit insurers remain stable in the face of the adverse global credit risk environment, while keeping a close eye on international developments. This is according to Marc Chadwick, Head of Insurance at Global Credit Ratings (GCR).

Credit insurance limits in Eurozone markets have been cut in recent months, triggered by concerns relating to the creditworthiness of certain European counterparties. Furthermore, in the face of the escalated risk environment, many European banks have curtailed trade financing, with the constricted cash flow cycle increasing the risk of default among importers and exporters.

Trade credit risk insurance is an insurance policy and a risk management product offered by insurance companies to business entities wishing to protect their accounts receivable from losses due to credit risks, such as protracted default, insolvency, and bankruptcy.

“Local insurers offering trade credit insurance are closely monitoring the situation in Europe, as further economic troubles there could have a ripple effect on markets in other geographies. While domestic insurers are not currently seeing their loss ratios rise significantly, the monitoring of a potential knock-on effect - leading to a deterioration in local market conditions - has been prioritised.”

Chadwick explains that credit insurers operate as monoline businesses, increasing the cyclicality of their claims patterns relative to traditional multiline insurers. Furthermore, given the direct linkage between these insurers’ exposures and the underlying trade environment, their loss experiences tend to be exaggerated during economic expansions and contractions.

“Credit insurers employ flexible pricing structures as a means of applying risk-appropriate rates to high-risk areas of their portfolios.” Chadwick also says that, should the domestic credit risk environment worsen, “insurers will utilise more pronounced active management practices, and work closely with clients to monitor their exposures, implementing targeted risk management strategies where possible,” he says.