Loss ratios for credit risk insurance break the 100% level

Loss ratios for credit risk insurance climbed from between 20% and 30% prior to the financial crisis that began in 2008 Q3 to more than 100% currently, driving a hard market in the line, said Daniel Galvao, senior vice president of financial products at Marsh Canada Ltd. (Toronto).
Galvao spoke at the RIMS Canada Conference being held in St. John’s, Newfoundland from Sept. 13-16. He was a panel member at the session, ‘Credit Risk: Risk Management Implications on Managing Financial Volatility, Corporate Governance and Counter Party Exposure.’
Prior to Sept. 2008, the credit risk market was incredibly soft and ultra-competitive, with plenty of capacity and lots of new product launches said panel-member Todd Pickett, a general agent with Coface Canada (Toronto).
“Fast forward to 2008 Q3, and it’s now a very hard market with record losses,” he said.
“Underwriting is definitely conservative. We have done three major cuts in our capacity in the past 12 to 18 months and each time we have cut capacity by about 5% across the board, so capacity is definitely shrinking.”
Account receivables premium is derived from sales. Larger sales volume translates into larger premium volume. In the current economy, sales are slowing, so premium is shrinking — even though rates are increasing, Pickett continued.
Higher reinsurance rates are also a factor in the rate increases, Galvao added.
“The large monoline global players have implemented programs to ‘re-calibrate’ their exposure (through cancellation or reduction of coverage) and adjust premium rates upward,” Galvao wrote in material he distributed to delegates.
“Multi-line insurers typically offer non-cancellable coverage and therefore couldn’t trim down their exposure, however terms are hardening for upcoming renewals.”