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Credit and Political Risk Claims Review 2020

Credit, Political Risk and Terrorism
COVID 19 Coronavirus

By Claire Simpson | February 10, 2021

In this article we discuss the key themes found in the loss activity of 2020.

Introduction – what a year!

When writing our review in 2019 we forecast elevated claims activity in 2020 but we certainly couldn’t have predicted the level of economic and social upheaval brought on by COVID-19. Let’s explore the 2020 loss activity and what the key themes were.

2020 predictions – how well did we do?

We were right with most of our thinking back in January 2020 when we wrote our 2019 review, even if the rationale behind it was wrong. 2020 did indeed see an increased volume of claims activity – paid claims were up 10% on 2019. We also saw troubled (pre-default) files grow, though understanding lenders have extended maturities on many loans which has insulated the market from seeing losses in the volume initially anticipated when the virus struck. Whether this forbearance allows companies and indeed countries the headroom they need to make a comeback remains to be seen.

We were right that African losses would continue to feature heavily and that credit losses from Asia would increase, though our reason for making that prediction had more to do with the China-US tensions so prominent at the time, instead of Asia being first to feel the impact of governmental lockdown strategies.

This graph shows claims made between 2009 and 2020
Willis Towers Watson Claims - $1.22bn paid since 2008

This graph shows claims made between 2009 and 2020

African losses continue to dominate

Let’s delve a little deeper by looking at the same data broken down by region.

This graph shows claims made between 2009 and 2020
Claims by region since 2008

This graph shows claims made between 2008 and 2020 by; Africa, Asia, Latin America, North America, Canada, Europe/CIS and the Middle East.

Since 2015 African losses have played a key part in the total numbers of claims collected by Willis Towers Watson, averaging 57% of total claims collected. Losses have largely stemmed from three principal political risk related sources, namely cash stricken national oil companies hard affected by price volatility, countries with foreign exchange issues and more recently outright sovereign default.

Asian claims also on the up

Deals located in and sourced from Asia saw a marked uptick in credit losses this year. While there were no industry themes to point to, many losses appear to have stemmed from counterparty fraud perhaps due to tough economic conditions leaving nowhere for weakened corporates to hide.

These losses (as mentioned above) were split roughly 50:50 between credit losses from Asia and contract frustration losses in Africa. Notably there were no political risk PR coded losses notified to us during 2020 in the Willis Towers Watson portfolio, though we understand the market did see some sizeable notifications.

How are insurers handling the increased volume?

Having lived through the Global Financial Crisis there was a palpable expectation of COVID-19 being the next big thing to present the credit and political risk insurance market with a material loss event. We anticipated potential lack of access to loss adjusters given increased claim volumes leading to potential late payment of claim settlements and have been watching insurer performance keenly. To date we are pleased to report that the market has responded very well to the increased volumes and to the logistical challenges presented by staff working from home and virtual loss adjustments. Most importantly for our clients, claims continue to be paid in full and on time.

2021 Crystal Ball – is loss activity set to increase further?

Dare we even look at what 2021 will bring or be bold enough to make predictions? Government support packages for businesses remain in place in many countries and may be masking the after -effects of lockdowns. When these start to taper – be that in the Spring or later – we will start to feel the full effect on the many industries facing unforeseen and unmodelled loss scenarios. Into that mix we can add a new US presidency, the “other side” of Brexit, multiple legislative and general elections around the world – many in Africa. No doubt 2021 will bring a few surprises of its own but one thing is for sure the loss legacy of 2020 will continue to challenge, and it is very reasonable to assume that loss activity will rise again.

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