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Expert opinion
08 June 2022

Closely held cards for CPRI

Middle East & Africa, Americas, Asia-Pacific, Europe
Head of Trade, Treasury and Risk
In a tale of closely held cards, sensitivities and ripple effects, TXF takes a look behind a complicated CPRI market. What’s really happening in the private insurance market amid the back-to-back black swans of the pandemic and the Russia/Ukraine conflict?

There is no neat Russia/Ukraine-sized hole in the private credit and political risk insurance market. It is way more complicated than that. The Berne Union’s second quarter business confidence indicator based on a poll of its members and released on 24 May is a good gauge of sentiment in the private insurance and officially supported export credit markets. The fall in risk appetite from the insurers and the rise in demand tells an unsurprising story. 

“Underwriters are tightening their risk appetite with declines now reported in both the first and second quarter of 2022, markedly for private insurers. The lower risk appetite is mainly driven by the war as several providers have limited or gone off cover for Belarus, Ukraine, and Russia. Private insurers indicate expectations of reduced primary market activity as well as tighter reinsurance capacity,” the Berne Union report says. The report also notes emerging claims situations ticked up in Q1 2022, mostly related to exposure in Belarus, Ukraine, and Russia, “but most underwriters stated that it was a limited rise for now. Expectations are that claims paid will indeed rise in the second quarter, with the war being the main driver of the increase, however both rising prices and the phase-out of [COVID-19 state] support schemes are also highlighted as key drivers.”

Certainly, the impact of the Russian invasion has a long way to play out. It’s simply not yet possible to enumerate the costs. “You have to put a finger in the wind as this situation is not limited to any one insurance class. Normally when you've got an economic crisis, you're mainly looking at just credit insurance, but here you're looking at a longer list. In PRI you are looking at physical damage, political risk, political violence, and war cover. Then there’s the impact of sanctions. Everybody’s being rightly cautious,” says Sian Aspinall, managing director at BPL Global, a broker specialising in credit and political risk insurance (CPRI). 

“You can look at the macro position, but that gives you absolutely no idea what the impact on the micro level is going to be. Nobody is wise to put any figures on it, as it’s not simply a case of this is what our exposure is in X or Y. What figure will transpire to be in any given scenario is anybody's guess because this is a unique set of circumstances,” says Aspinall. She adds, “No one has tried to navigate these situations before. There is the unprecedented level of sanctions, etc., but that doesn't mean you can't abide by the sanctions and still maintain some commercial relations. People are going to be very sensitive about that.”

Another European trade credit insurer confirms, “Everyone is keeping their cards close to their chest regarding the Russia/Ukraine impact.” He observes, “CEN [confiscation, expropriation, nationalisation] /PV [political violence] and aviation underwriters are likely to have already been affected. The CF [contract frustration] and CR [credit risk] underwriters have not been affected yet, but how sanctions will interfere with paying potential claims is in a lot of people's minds. The loss scenarios will take many angles, so it’s difficult to have certainty or to communicate on this.” 

Those future uncertainties do not affect the present. “The impact of the geopolitical evolution and of commodity prices have of course a strong positive effect on demand and on prices, so it should offset the loss of new Russian business.” The trade credit insurer adds: “One key element on the bottom line will be the ripple effects of high inflation and supply chain disruptions/reorganisations on national economies and specific sectors over the next 24 months. All specialists, from economists to underwriters, are trying to reassess their portfolio and appetite for new business on that basis.”

Sanctions and the long game 

Sanctions are easy to write but very difficult to implement. Lawyers who cannot work out what or where a dollar is will certainly charge clients a small fortune to find out whose dollar it is. It has taken some interpretation of the multiplicity of sanctions by lawyers, and sometimes those issues have not been clear. For sure, lawyers have been busy, and one rueful client sums it up: “Russia has a very resourceful commercial sector and many Russian entities themselves are very keen to maintain relationships that have been built up over years. They don't want to be in a position where they're defaulting or look like they may default.”

Things don’t get easier when it comes to reinsurance where the different insurance classes meet, mix and mingle. A specialist insurance and reinsurance broker explains: “Insurers all have reinsurance treaties, and it depends upon how those are structured. Quantifying net losses, the exemptions and all the other parts of the treaty, Russian obligors are pushing towards getting to be able to service their debt as well. We’re a while away from understanding the true effects on the market.”

Optimism for the private market – but still selective

Nonetheless, there are bright spots for the private CPRI market. “The market is writing new business and enquiry levels are where they were pre-pandemic,” says Aspinall at BPL. “Through the pandemic, the market was obviously selective and there was an element of a flight to quality in terms of the clients who were supported – particularly because insurers were so reliant on the individual clients’ due diligence. You wouldn’t necessarily expect that approach to be relaxed given we’ve gone from the pandemic to where we are now with the Ukraine crisis. That said, new business is still binding and insurers are obviously making their own judgments on the impact of the current conflict and what that means for their own risk appetite beyond the obvious country impacts in terms of contagion and what they think that contagion will be. The benefit of having a large market is that one insurer’s methodology and conclusions do not always mirror another’s.”

Public/private cooperation

There remains little doubt that the private insurance market and the officially supported export credit market will continue to work with increasing levels of symbiosis. “It's widely known that a large number of ECAs have at least some marriage point with the private market. In the past the overlap was more restricted to tied commercial loan linkage involving an ECA’s lending/guarantee side but it’s now more a case of facultative and treaty reinsurance covers into the private market. This has been a growing proportion of direct insurers’ portfolios and an obvious area of growth,” concludes Aspinall.

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