The Covid-19 pandemic risks creating a permanent reduction in appetite for insuring businesses that rely on physical contact, such as shops, restaurants and event organisers, a top EU regulator has warned.
Trade credit insurance underpins trillions of dollars worth of trade each year, covering businesses against the risk of non-payment by the companies they supply with goods or services.
In its 2021 financial stability report published on Tuesday, the European Insurance and Occupational Pensions Authority said there was a growing view in the sector that “some industries are inherently vulnerable”, highlighting face-to-face sectors such as retail, aviation and leisure.
Future pandemics and lockdowns are “new potential sources of correlated defaults across industries”, Eiopa said, leading to a fundamental change in how trade credit insurers gauge risks. They “may therefore see much higher credit risk in these industries than previously modelled”, it said. “This could lead to permanently lower coverage in these sectors,” Eiopa added.
Governments across the world have put in place trade credit insurance backstops during the pandemic, to share risk with insurers and stop them pulling coverage of businesses during the crisis. As the economic outlook worsened, European trade credit insurers reduced their overall exposure by about a tenth in 2020, Eiopa said.
Ultimately, insurers paid out €3.8bn globally on trade credit policies in 2020, a rise of 12 per cent on the previous year, according to data released last month by the International Credit Insurance and Surety Association.
The figure would have been much higher, it said, without a range of state support measures, including furlough schemes, that kept companies in business and paying their bills.
Before the expiry of the UK trade credit reinsurance scheme at the end of last month, retailers and other groups raised concerns that insurers would remove coverage.
The Eiopa report also flagged risks from the climate crisis and the growing number of cyber attacks that have hit groups such as Axa in recent months, and put pressure on the cyber insurance industry. Remote working has created more opportunities for hackers, Eiopa said.
Annual damages from climate-related catastrophes in the EU and UK are forecast to more than double from an average of €22.9bn over the three decades from 1981 to €45.7bn by 2050, if temperatures rise by 1.5 degrees Centigrade and there are no adaptation or mitigation measures taken, according to the report. By the end of the century, such damages could reach €71bn a year.
The report said insurance against damage from climate change, such as flooding and droughts, could substantially reduce the impact on gross domestic product. But it warned that “the insurance protection gap in Europe is already substantial, and there are several reasons to suspect it may widen as a result of climate change”.
Eiopa estimates 56 per cent of hurricane and storm surge damage in Europe is insured, while coverage for landslides and floods is 28 per cent and for extreme temperatures, droughts and wildfires it is only 7 per cent.