Political risk and trade credit
In this chapter of our Annual Insurance Review 2021, we look at the main developments in 2020 and expected issues in 2021 for political risk and trade credit.
Key developments in 20202020 has been dominated by a subject that features heavily in this Annual Insurance Review – COVID-19. While not experiencing the volume of claims seen in other markets, the Trade Credit market has not been immune to the impact of the global pandemic. The lack of supply/demand during widespread lockdowns and the impact of trade logistics have put Trade Credit underwriters and claims teams on constant alert.
Trade Credit policies contain a variety of protections that enable suppliers, buyers and financial institutions (with the support of underwriters) to reschedule payment obligations. We have seen many such arrangements put in place over the last year with the hope that the impacts of the global pandemic will be time-limited and that companies will bounce back financially once global restrictions are lifted.
But this action has not been limited to private companies. Measures instituted by governments around the world (such as grants and COVID-19-recovery loans) appear, in part, to have succeeded in alleviating the initial shock on many companies. However, this is not to say that the global trading environment was in rude health before the onset of the pandemic. For example, traders were already facing significant pressure with the continued depression in the global oil price. It might be that these government actions, including interventions such as temporary suspensions on the requirements of companies to file for insolvency, have had the effect of postponing difficulties that might, in any event, have been inevitable.
Clearly these measures cannot last forever as private companies look to their own balance sheets and governments yield to the fiscal pressures associated with providing this unprecedented level of support. While at the time of writing vaccines are beginning to be distributed, a global vaccination program will clearly take significant time, and getting back to an approximation of the "pre COVID normal" even more so.
Therefore, one cannot rule out the possibility of significant claims hitting the market in 2021 even if the vaccine rollout has been successful. To a degree the Trade Credit/Trade Finance market is holding its collective breath and hoping for the best, and crystal ball gazing is likely to be of little comfort.
What to look out for in 2021
From a UK/EU perspective, the Brexit endgame appears to be around the corner. We commented in the 2019 Annual Insurance Review that a year to reach a free trade deal was 'incredibly tight'. This appears to have been an accurate pronouncement given that discussions are going to the wire. Trade disruption seems inevitable at this point regardless of whether a free-trade deal, or any nature, is reached. While the pandemic has shifted global focus, the results of these negotiations will no doubt have an impact on a significant volume of UK and EU-domiciled companies and the fall-out could well find its way to the Trade Credit market.
Brexit also gives rise to considerations of global politics. In the 2019 version of this chapter we highlighted how traditional alliances had shifted across 2019, and the potential difficulties this presented for political risk underwriters. While the US-election may have the effect of calming certain geo-political tensions (such as with Iran and China, though perhaps not as between the US and Russia), the impact of COVID-19 may bring with it greater challenges in the political risk market.
The drivers for protectionism may well be exacerbated by the global recovery from the pandemic. Nations have spent many billions on measures to safeguard populations and economies and the extent to which tax rises and/or domestic cuts are required in order to pay the resulting bill could have a significant impact on domestic policy towards foreign companies.
Tax breaks and subsidies provided to foreign investors, often necessary to make an investment attractive, may no longer be palatable when a domestic population is faced with increased costs and potentially decreased standards of living. Investors may well argue that the removal of such measures is a political risk attracting cover under their CEBD policy. Similarly, governments with a precarious hold on power may seek easy and quick 'wins' in order to shore up support. Foreign-owned assets may represent easy targets in these circumstances – again giving investors cause to examine their CEND cover.
Determining cover for political risk claims is often a complex exercise requiring underwriters to unpick the fact pattern and determine what has actually occurred. Current pressures may add to this; investors determining that a foreign project has not quite developed as planned may see a political risk policy as an escape route. It is critical that full enquiries are undertaken during the adjustment process and consideration is given to whether the loss claimed actually fits within the contours of policy coverage, with the latter often requiring consideration of not just domestic law, but international law.
While the world has been united to a degree during 2020, the recovery may not be as congenial.
Download our full Annual Insurance Review 2021 for more insights.