In this chapter of our Annual Insurance Review 2022, we look at the main developments in 2021 and expected issues in 2022 for political risk and trade credit.

Key developments in 2021

Last year's version of this chapter focused on COVID-19 and its potential to impact the Trade Credit market in 2021. The good news appears to be that the market has weathered this storm relatively well during the last 12 months. We are told, anecdotally, that the very significant capital reserves built up by underwriters expecting to be inundated with claims appear to be in the process of being released, potentially freeing up capacity for new business. We discuss in a moment whether it is perhaps too early to pop the champagne on this front.

That said, it has not been plain sailing. The last year continued to shine a light on the complex nature of cross-border financial instruments (see, for example, the continuing fall-out from the Greensill scandal) and the role of insurance. Trade Credit insurance is a critical component of global trade flows and it is critical that its place and operation is not questioned unreasonably due to the actions of certain entities/individuals. In fact, the Trade Credit market is often the target of bad actors seeking to defraud underwriters via claims based upon fictious transactions. The underwriting and claims process in this market has remained as complex as ever over the last year.

Peering into our crystal ball in 2020, we also considered the potential impact of Brexit and negotiations on the future trading relationship between the EU and UK. The EU-UK Trade and Cooperation Agreement (TCA) was, eventually, concluded, but the Office for Budget Responsibility (OBR) has indicated that trade flows have reduced following the end of the transition period on 1 January 2021. The OBR indicates that the full impact of Brexit on trade flows will not be known until the TCA has been fully implemented and business has had an opportunity fully to adjust to the changes to trading conditions; this includes potential changes to supply chains. With change also comes risk and the trade credit market is clearly well placed not only to facilitate trade but also mitigate against these risks.

Looking forward to 2022

At the time of writing, the UK Government has just announced new measures to combat the spread of the Omicron variant. It therefore appears that the next 12 months will not be the return to normal for which most had hoped. The new variant, and public heath measures in response, have the potential to impact both the Trade Credit and Political Risk markets, as well as those underwriting, or excluding, political violence risks.

For Trade Credit insurers, there still remains the 'known unknown' of the degree to which unprecedented government measures such as grants and COVID-recovery loans over the previous 18-months artificially propped up buyers that would otherwise have faced financial difficulty. At present, there is little indication that similar measures to those deployed at the height of the pandemic will be forthcoming once more (from the UK Government, at least). Could it be that COVID-related buyer defaults will eventually find their way to the market, en masse? This may depend on several factors, but it certainly appears too early to predict low loss-ratios for the coming 12 months. That said, Euler Hermes predicts global trade volume will rise by 5.4% in 2022 and 4% in 2023 as global supply chain issues, caused predominantly by supply chain and logistical bottlenecks, ease. With increased trade one might hope, and perhaps expect, greater premium to follow.

From a political risk perspective, Governments across the globe face the prospect of trying to convince weary populations that renewed restrictions are necessary. We previously referred to the prospect of Governments seeking 'quick wins' divert from internal issues and/or change a problematic narrative. A foreign investor perceived to be benefiting from Government subsidies and/or a State's resources can represent a tempting target. This kind of political environment is becoming more dangerous for foreign investors in countries that may not have been commonly associated with the kinds of actions protected against by a CEND policy. The populist leanings of the Host Government will need to be carefully considered by an underwriter on the presentation of new risks. Similarly, existing risks coming up for renewal may require greater scrutiny than might otherwise have been necessary.

Finally, we have already seen an increase in civil unrest and disquiet in Western Europe and beyond as a result of renewed COVID measures. This unrest, with the possibility of more as the Omicron variant spreads, will likely lead to restless nights for both property and political violence underwriters. SRCC and political violence insuring clauses (and exclusions) often list a series of different events that, to a lay person, may seem very similar but through a combination of case law and market practice have particular bespoke meanings. The task of determining whether a particular event leading to damage/loss falls within one state of affairs or another can be a difficult task, requiring substantial evidence. Significant sums can and often do turn on this analysis. While we hope that civil unrest is minimal across the globe, underwriters may be wise to select their risks with significant caution.