Credit and surety in the age of economic uncertainty

Trade credit insurance (TCI) and surety give confidence to businesses when they trade, and public entities when they invest in construction, supporting the real economy. We estimate that TCI and surety covers generated combined global premiums of USD 33 billion in 2022. They represent about 1‒2% of our estimated total Property & Casualty (P&C) insurance premium volumes but, over the past 20 years, they have grown globally by about 5‒6% annually on average, higher than the overall P&C market (~2%) and in line with average world gross domestic product (GDP) growth (5.5%).

Each segment is differently exposed to the economic cycle. TCI is cyclical, with both premium volumes and loss ratios strongly linked to trends in global trade flows and business insolvencies, respectively. Premium volumes in contract surety, the largest segment in surety, are driven by construction activity and public investment in infrastructure and so are less strongly cyclical. Surety claims may be driven by a deterioration in overall economic conditions, particularly in the construction industry. However, there is no automatic link between the business cycle and surety loss ratios and a large part of the losses can generally be mitigated through the recovery process.

Both TCI and surety protect against business insolvencies. Probability of default and all its drivers like economic and trade activity, inflation and interest rates, are key indicators for the segments. TCI protects the seller of a product against the default of a buyer, helping businesses to manage credit risk. It typically covers international goods trade, thereby underpinning global supply chains. Trends in manufacturing, supply chains and trade are key. Contract surety supports completion of public infrastructure projects by providing a performance guarantee on a contractor.

The past two economic downcycles have tested the resilience of TCI and surety underwriting. During the COVID-19 pandemic, digitalisation and state reinsurance schemes in Europe contributed to greater continuity in TCI covers than during the global financial crisis. Broader economic measures such as fiscal and monetary support and temporary changes to bankruptcy laws also reduced insolvencies to historic lows, which reduced TCI loss ratios. Good underwriting discipline contributed to the avoidance of a surge in surety loss ratios during the global financial crisis, and government support prevented a rise in insolvencies in the construction sector during the COVID-19 crisis.

The phasing out of COVID-19 crisis support may contribute to rising bankruptcy rates and push up claims in TCI. This is reinforced by the prolonged period of high inflation and weakness in manufacturing activity. Surety companies are also coming under pressure as constructions firms contend with higher interest rates, elevated inflation for wages and raw materials, as well as labour shortages. Over the medium to long term, we anticipate that large investments in infrastructure projects should sustain growth in the sector.

Digitalisation and the deployment of artificial intelligence (AI) can facilitate more efficient data collection, processing and analysis. Trade credit insurers can improve their underwriting and adjust their limits more selectively. Digital platforms are also being deployed to facilitate exchanges between stakeholders. However, in TCI they have not yet enabled insurers to expand significantly to new segments such as SMEs. In contract surety, digital capability is becoming a key requirement to  remain competitive.