0:03
SPEAKER: Welcome to WTW's Global Marketplace Insights series, where our experts bring you the latest risk and insurance perspectives.
0:24
STUART ASHWORTH: I'm Stuart Ashworth, and I'm the head of broking and client engagement for the Financial Solutions (FS) division here at WTW. Now, for those who are not familiar with financial solutions, we're a global line of business, and it's within Financial Solutions that we house our trade credit business, our bank non-payment business, our political risk business, and our lenders' insurance advisory practice.
0:48
In a recording released earlier in the year, I spoke about market developments in the bank non-payment space. So this time around, I wanted to give an update on what's happening in the trade credit universe. Trade credit supports a wide range of industries and sectors. And as you'd expect, appetites vary, and each industry has its own features. Some sectors are under stress on the back of weaker demand, but on the other hand, we have sectors with a stable and improving outlook.
1:14
So given the varied industries we focus on as a company and consequently we focus on as a department, I thought it would make some sense to talk about some of the sectors that we most commonly see. Now, market reports are available for these sectors if you want them. But let's start with the good news.
1:31
The agricultural food sector is still seen as a safe haven. Geopolitics is casting a long shadow over the sector as food security is back on the agenda for most countries. Climate change and extreme weather continue to blight the industry. But a growing global population with an increased demand for alternative foods is maintaining a healthy demand, which is protecting the industry.
1:55
In a similar way, the electronic sector is growing, despite the fact that this is a highly cyclical industry, which struggles in the turbulent swell of China-US tensions. The sector has an enviable broad client base as the fourth Industrial Revolution demands more automation, and that keeps the demand for semiconductors and associated equipment high. But if there's one sector that insurers love, it would have to be the pharmaceutical sector.
2:23
Despite the fact that the pandemic driven revenue is fading, the sector benefits from higher barriers to entry, improved health care in the emerging world, and an increase in global dependency for medication supported by a robust pipeline of new medicines. However, not all sectors are so lucky. So let's turn to some of the trickier sectors.
2:44
Construction remains a concern for the insurance industry. Subdued construction activity and a lack of skilled workers is putting pressure on an industry, which has seen troubled times. But there are signs of hope, and that's coming in the shape of sustainable green finance and global public policies, which are supporting infrastructure investment and housing.
3:05
Finally, the retail sector continues to raise eyebrows. Consumer confidence is low as wage growth stagnates. But the real concern is in the fixed real estate end of retail as it struggles to fight off the competition, which is coming from e-commerce. Given the variation in industries that the trade credit market supports, what trends can we expect to see in the marketplace?
3:30
The first observation is that the market continues to grow, both in the number of market participants but also in the revenue of the trade credit insurers. We're seeing several of the larger insurers chasing revenue, and that growth is often coming at the expense of their loss ratios. Now, touching on those loss ratios, what are we seeing in the world of claims?
3:52
For the trade credit business, we've seen a clear uptick in claims this year. However, this is consistent with our early predictions that 2024 would see an increase in business insolvencies. We've seen claims increasing across the globe. But as you may expect, there are variations in risk levels between different regions. Asia is generally seen as being safer, with Latin America being seen as more risky.
4:18
In the current claims market, sadly, no one is immune to claims, and banks continue to suffer payment defaults. Now, financial institutions are a good bellwether for the global economy. And over the last few years, we've seen some consistent claims activity, and it's worth touching on that.
4:35
Since 2021, the market has seen $2.1 billion of claims. Now, 2021 produced just under half of that number. But 2022 and 2023 have each produced over $500 million of claims. Now, it's almost inevitable that as a market grows, claims grow. But there have been a few notable industries that's worth calling out.
4:56
Now, from that 2.1 billion, transportation has contributed about 670 million. Construction, about 480 million. And despite the fundamentals of the farmer sector, health care has contributed about 250 million, with metals and mining coming in at 240 million.
5:15
Now, our insurers expect to pick up losses on credit business and non-payment business. Political risk claims are less common, but they are increasingly hitting the market with sovereign defaults in Ukraine, Russia, and Kurdistan, to name but a few. So given this claims activity, what are we seeing happen to rates?
5:34
Well, somewhat surprisingly, we've seen that rates remain flat. Now, this seems at odds with the perceived wisdom that rates should increase in the face of an increasingly risky credit environment. But trade credit has traditionally been dominated by the big three players of Allianz Trade, Coface, and Atradius. But over the last few years, we've seen a number of MGAs establish themselves in this credit space.
5:59
Now they're targeting corners of the market, niche areas, excess positions, and this has created a softening of the market, where insurers are fighting for these clients. As is the case in most classes of insurance, the insurers are competing on products, service levels, but most importantly on price. And it's this additional capacity and the competitive tension it brings, which leads to pricing increases, which is keeping rates in check despite economic headwinds.
6:27
Now, as you would expect in an ever-changing world, price in isolation is never enough, so insurers are increasingly leaning into innovation and digitalization in order to maintain a competitive advantage. In fact, the entire credit ecosystem is looking to differentiate itself through innovation and digitalization. In WTW, we're looking at a range of digital solutions and data solutions which could help our clients, but we can discuss these in more detail in future recordings.
6:58
So what's the future likely to hold? Now what is clear is that clients remain concerned with refinancing risks and non-payment risks. But the good thing is that the market is growing. The market is competitive, it is well capitalized, and it's in a good place to continue to support clients.
7:17
So I hope this has been of interest, and if anybody wants more information on trade credit or any of the other products that financial solutions provide, please do contact me, and I can link you into your local trade credit or banking colleagues. But thank you again for your time.
