Credit insurers buoyed by economic environment

The three leading global credit insurers Atradius, Coface and Euler Hermes currently benefit from a supportive economic environment that is limiting corporate insolvencies, according to Moody’s.

"Credit conditions in developed economies have been supported by low interest rates, moderate economic growth, and low inflation," said Brandan Holmes, senior credit officer at Moody's. "These factors have outweighed competitive pressure on prices and weaker results in emerging markets," Holmes added.

The three global credit insurers have reported an average combined ratio of approximately 81 percent for the seven years from 2011, according to the Moody’s April 12 analyst note.

However, credit insurers' underwriting flexibility, and consequently their risk profile, is under pressure, Moody’s noted. Firstly, their exposure to medium-term risk is growing as they write more surety and bonding business and sell more medium-term structured trade credit insurance products. Secondly, credit insurance contracts increasingly include restrictive features such as noncancellable limits and risk extenders (i.e. grace periods on limit cancellation).

Surety and bonding business diversifies credit insurers' risk to some extent, as it brings exposure to non-performance and counterparty credit risk rather than pure trade credit risk. However, it is longer-term, with policy durations typically ranging from three to seven years, Moody’s noted. At the same time, surety and bonding contracts do not include cancellable limits, in contrast to trade credit policies.

To the extent that longer-term exposures take up a greater share of the insurers' total exposures, Moody’s believes the insurers' product risk profiles will deteriorate, possibly requiring them to balance this by holding more capital against this business relative to pure trade credit business. In addition, while capital models tend to allow a diversification benefit for surety business, correlations between surety risks and trade credit insurance risks need to managed closely.

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