With the Covid-19 pandemic extending well into 2021, how has the ongoing crisis affected the insurance industry, and in particular, underwriting? One of our Senior Credit and Political Risk Underwriters, Ed Ashton, recently sat down with other specialists during a roundtable hosted by Global Trade Review (GTR) to discuss. The roundtable featured several industry leaders, both bankers and underwriters, from across the Credit insurance market and covered everything from the ongoing resilience of the business, to the shift in credit quality and scrutiny around policy wordings. Below, we have included Ed Ashton’s answers from the roundtable, detailing how we at Tokio Marine HCC have adapted to the current climate.
Are there any lessons to be learned from the previous crises which we can apply here, and how do you underwrite through a crisis?
The only change that we’ve made throughout the Covid crisis has been to focus on key insureds, companies that we’ve got a track record with, those who we know how they operate, that we’ve been working with since and before the financial crisis. Based on the track record there, we feel more comfortable underwriting in these more difficult times.
Is this at the expense of new entrants to the market?
To some degree. We are certainly not closed to new entrants. In fact, it’s the opposite. We encourage new companies to come to the market. That is how the market has thrived over the last 30 years or so. It’s just the timing to support a new client in any great volumes is obviously pretty poor, and faced between a new client, or a bank or corporate that you’ve worked with numerous times in some difficult situations, then you are always going to favour the path that you know well.
On the issue of pricing, we as a market largely follow the fortunes of the banks; is there indeed scope to increase the rates? Is there a disconnect between the pricing that the banks need and what the insurers are asking for? And, if indeed there is that disconnect, are we perhaps in danger of biting the hand that feeds us?
We normally try to be as transparent as possible from the start on the pricing that we require to make the transaction work from our point of view. If there needs to be a little bit of fine tuning down the line then we can address that, but at least you know what we need.
We’re seeing reports that claims might very well eclipse those of the global financial crisis. If that view is correct, how well is the market equipped to deal with this?
The focus here has been on the corporate side, but you have also got the added complexity that there is a number of sovereigns who are looking to restructure their debt in Africa in particular, and that is an additional headache that we are working through at the moment. We’re keeping an eye closely on how the restructuring discussions go and what the approach will be from our insureds.
What do you think the prospects of recoveries are going to be this time around? And what about enforcement of those securities? And, if the experience turns out to be not terribly positive, could we perhaps see the insurers giving more importance to PD rather than LGD, for example?
Sometimes it is a trade-off between the time that you are spending on a case and what you can get in the secondary market. If the secondary market is quite good from a pricing point of view, at 70-80%, and the expectation is that you are going to get a recovery of 90-100% in five years’ time, then for the sake of 10%, why not just sell out, move on, and focus your efforts elsewhere? But, don’t get me wrong; we hate leaving money on the table, especially when it comes to recoveries.
Is there more scrutiny around existing policy wordings? Are you pushing back slightly? And are the banks getting what they need?
Policy wording discussions are being raised in our credit committee when we talk about specific deals and the certain parameters that the policy would cover. This is something that is getting looked at more frequently and in more detail by the management.
If you are interested in learning more about how insurers and banks are responding to the crisis, you can read GTR’s full roundtable article here.