COVID-19: Implications for Financial Institutions and Trade Credit in Asia

Concluding our webcast series on COVID-19’s implications on various industries, on 28 May we looked at navigating the pandemic cycle for financial institutions and trade credit in Asia.

Joining me on the panel were:

Sharon Kerr, Financial Institutions Leader and Deputy FINPRO Leader, Asia
Tyler Wendleken, Trade Credit Leader, Asia
Rohan Muralee, Mercer Marsh Benefits Sales Leader, Asia
Adam Russell, Placement Leader, Asia
Darrick Cheung, Client Engagement and Development Leader, Client Advisory Services, Asia

Financial Institutions

A deep global recession is likely, the worst since the 2008 financial crisis, as forecast by most rating agencies and central banks. This poses unique challenges for Financial Institutions with both emerging risks and opportunities.

Customer focus

During this period, Financial Institutions need to be seen as clearly focused, empathetic, and supportive of their customers and adapting to their changing behaviors, especially since there was a decline in public trust in these institutions after the 2008 global economic downturn.

Financial impacts

The pandemic’s financial impact on Financial Institutions is undoubtedly complex and far-reaching, with issues such as liquidity and capital coming into the forefront. The key areas of focus are:

Balancing the financial impact while keeping customers at top priority, such as in cases of managing non-performing loan (NPL) portfolios.
Managing cost base. Pressures from the ever-increasing cost of compliance with regulations have only intensified with the pandemic. Furthermore, compliance risks have increased due to the change in working practices, such as an increased potential for market abuse risk while employees are working from home.

Technology risk

Working to keep distribution challenges open.
Urgency to upgrade systems.
Cyber-attacks and data fraud.

The current environment of uncertainty and panic are cyber criminals’ best friends. Cyber-readiness will be more important than ever.

Trade Credit

The global pandemic has brought certain trade sectors to a halt, impacting many industries that Financial Institutions work with. 2020 growth forecast:

Global: -3.3%
APAC: -0.6%
The USA: -2.7%
Eurozone: -9.3%

Rebound forecast in 2021 for global growth is +5.6%.

Governments have adopted a “bazooka” approach with fiscal stimulus packages and state guarantees, but there are still severe repayment delays and insolvencies.

Trade Credit insurers have reported a 100% increase in past dues and claims versus previous years. Some of these debts will be paid down as economies restart, however, a large number will become full-blown claims. Trade Credit insurers are thus more conservative in underwriting risk for policyholders with reductions and cancellations, and it is becoming harder to acquire capacity in a market traditionally dominated by three short-term non-Export Credit Agency monoline carriers (85% market share globally).

Financial consequences

The global supply chain disruption may accelerate companies’ search for ways to reduce future disruptions. The increase in corporate defaults forecast for 2020:

USA: +25%
Europe: +19%
China: +15%
Global: +20% (YOY from 2019)

Initially, economists forecasted a V-shaped recovery, however, it is now more likely U-shaped due to ongoing, but gradually easing, confinement measures.

Positive impact and new opportunities

In the last few years, Trade Credit claims per annum have amounted to approximately US$5 billion. Analyst reports in early May 2020 outlined initial estimates of claims paid in the next few years to be US$15 billion to as high as USD45 billion. This could lead to more Financial Institutions using Capital Relief wordings, where Capital relief can vary between 40–95%.

Banks only constitute 13% of some of the largest Trade Credit insurers’ gross written premiums (as policyholders). When economic conditions improve, additional capacity should come into the Trade Credit market. This additional capacity will enable carriers to write large lines for policyholders.

In Asia, Trade Credit as a product still has limited penetration — less than 5% overall. This is in contrast to certain Western/European countries where penetration is more than 45%. India and China currently do not allow Financial Institutions to act as policyholders. However, this is might change and should that happen, it could lead to higher take-up rates.

Cost Savings

From a risk management and insurance perspective, businesses have several tools available to manage costs and improve cash flow. The approaches below were shared by Darrick, Adam, and Tyler.

Risk Finance Optimization

We can identify the most economically efficient means to finance your risk through Risk Finance Optimization (RFO), which ultimately gives you information on which risk management programs provide the best financial returns. This process is thorough, so it is best to start several months ahead of your renewal date.

Alternative Solutions

Alternative Risk Transfer options, such as Parametric Insurance, can be a long-term alternative strategy. The use of a Captive may provide access to reinsurance markets and potentially more efficient capital.

We have already begun to see a significant shift in insurer pricing, with rating adjustments broadly impacting clients across most major lines and geographies. Therefore, an access to a wider market has the potential to unlock an increased competition for risk transfer programs and provide greater transparency and visibility on how the reinsurance market is pricing risk.

Surety Bonds

Bank Surety bonds free up traditional guarantee lines with banks, i.e.:

Replacing bank guarantees with Surety Bonds (traditional approach).
Backing 100% of bank guarantees/Securities-Based Credit Lines (bank surety fronting).
Sharing via risk sharing or insurance policies.

They can also release liquidity/collateral pledged in favor of banks.

As mentioned previously, capital-relief-approved trade credit wording allows banks to save regulatory capital, reducing the banks’ Risk Weighted Assets. This can be up to 95%, allowing the bank to originate multiple deals using the same amount of capital. Insurers are experienced in syndicating and creating sizeable credit limits on investment-grade names.

Employee Wellbeing and Productivity

Rohan talked about how there are many ongoing debates on should a portion of real estate spend can be re-deployed towards people. As traditionally large employers, Financial Institutions may well lead the trend on this.

More companies are picking up on non-traditional approaches to benefits, and due to the pandemic, insurers have started offering innovative benefits such as telehealth facilities and the home delivery of medicine.

For companies looking at the possibility of job losses or furloughing, we encourage them to review the possibility of continuation options through voluntary benefits. It will also be important to bolster the offering and adoption of flexible benefits, and further financial planning and assistance.

To support clients through their recovery phase, Mercer and Marsh Risk Consulting have put together a framework that boils down to three key areas:

Returning to work safely: Ensure employees are safe on their commutes and at work. This includes worksite safety, social distancing, equipment disinfection, screening, and testing.

Returning to stability: Understand the cost of returning to work and providing the health and safety measures.

Returning with energy: Provide additional support for mental health programs, wellness initiatives, and additional testing and screening, and in certain cases additional insurance coverage options.

Do contact us if you require such support.

Shifting Risk Profile

Darrick shared the four areas companies should consider to manage their risk profile changes:

Business Continuity Plan Reviews and Updates

In the short and medium-term, the focus should be on:

Staff safety and health: Safe distancing, segregation protocols, sanitation of premises, etc.
Planning for recovery or when governments ease restrictions: adopting a phased recovery to a “new normal” of business operations.

Pandemic Risk Vulnerability Assessment and Forecasting Models

In the longer term, these assessments and models enable organizations to evaluate different risk mitigation strategies, manage tail uncertainty under different scenarios (e.g. second wave outbreaks), and balance revenue interruption versus cost control decisions.

Cyber Threats

The first 100 days of COVID-19 saw a 26–55% increase in cyber scams. With the increased risk of cyber-attacks, companies should financially quantify such new exposure changes and develop appropriate risk management strategies, which can include insurance.

Professional Liability

We expect D&O insurers to increase underwriting scrutiny, so engage with your broker or insurers as early and as openly as possible.

Sharon and Dennis also added that insurers expect to see an increased number of claims on Employment Practices Liability (EPL) as rapidly evolving HR policies may not have been cross-checked and employees may allege discrimination or harassment.

Risk Management and Business Enablement

We concluded our presentation with an outline of how Marsh can provide immediate support through three primary activities:

Preparedness assessment and advice as the crisis unfolds, for example, ongoing advice that BCPs are “Fit for Purpose”.
Providing additional management capacity, including additional reviews and PMO support to navigate the crisis.
Debriefing (lessons learned) to better prepare for the future.

Our consumer solutions team also develops insurance solutions that can be offered on a B2B2C basis across many industries, for example:

Customer engagement programs for companies.
Employee benefits top-up programs for employers.

If you are interested in learning more about how Marsh can help, please speak to your Marsh representative.

Click here for the full replay of this webcast.