2020 Recap
The year 2020 will always be associated with the global COVID-19 pandemic and the resulting socio-economic fallout worldwide. Like other industries, the trade credit and political risk insurance industry experienced broad and deep impacts financially, operationally, and strategically. Trade credit and political risk insurers had to adapt quickly to mobilize tools and develop policies that would maintain essential trade flows of goods and services and help alleviate the economic impacts of the pandemic. The OECD estimates that 2020 saw a reduction of global GDP by 3.4% and a global trade contraction by 10.9%[1]. Such negative economic outlooks remain concerning for many governments and businesses.
Aside from the pandemic, other factors were at play in 2020, including macroeconomic conditions, geopolitical developments, and technological advancements, which also affected trends in the insurance industry and forced insurers to rethink their core strategies, including which products they offer, which markets they serve, and how they operate.
Challenges and Risks
It comes as no surprise that 2020 ranked pandemics and infectious diseases as the top perceived risk in the insurance market worldwide. The pandemic also accelerated the perception of other existing risks, such as public debt, cybersecurity, geopolitical tensions, unemployment, and inequality. Due to the speed and severity of the pandemic, scenarios that would typically have unfolded over many years instead took place over just a few months. These jolts increase the potential for risks to influence each other in unpredictable ways.
The pandemic’s initial shock in early 2020 saw a sharp increase in the number of insolvencies and the number of claims reported by credit insurers, but this decreased later in the year, thanks to the support that governments, and importantly, the coordinated nature of the responses, across the world offered to businesses[2]. Swift government assistance helped credit insurers improve their resilience to shocks and withstand most of the negative impacts on their business. However, there are concerns that a future reduction in government support could trigger economic instability and a spike in claims.
Overall, in 2020 the insurance industry had to develop innovative ways to mitigate the risks caused and accelerated by the pandemic. Trade credit insurance remained essential in 2020 for supporting trade flows and supply chains that are crucial for economic recovery, providing security to businesses and investors. However, the long-term implications of the pandemic are still ultimately unknown, and caution is still highly warranted going forward.
ICIEC’s Response to the Challenges and Risks
In the face of the global pandemic, ICIEC was fast to respond, forging strategic partnerships, ensuring the continuance of critical trade flows, and creating innovative solutions to help mitigate the fallout in Member Countries. ICIEC had to adapt quickly to the challenges of the COVID-19 pandemic to ensure the economic and social stability of its Member Countries by introducing several measures and initiatives to combat the negative impact of the pandemic on the economies of the member countries. These measures included introducing new products and insurance capacity. ICIEC’s total amount of business insured for 2020 amounted to USD 9.86 billion.
As part of the Islamic Development Bank Group’s ‘Strategic Preparedness and Response Facility’ (SPRF), ICIEC’s COVID-19 response to date reached USD 450 million in insurance, helping to minimize the adverse health and socio-economic impacts of the pandemic in Member Countries, especially for the most vulnerable populations. In addition to the SPRF, ICIEC also collaborated with IsDB on the innovative USD 2 billion COVID-19 Guarantee Facility designed to support the private sector and the Islamic Solidarity Fund for Development (ISFD) to create the ICIEC-ISFD COVID-19 Emergency Response Initiative’ (ICERI). The ICERI is a rapid COVID-19 response and resilience initiative with USD 400 million in funding, supporting import-dependent and developing Member Countries. These collaborative efforts continue to help Member Countries meet their essential import needs of pharmaceuticals, healthcare equipment, agricultural commodities, energy commodities, and other crucial materials and resources necessary to combat the negative impacts of the pandemic.
Successes and Opportunities
The disruptions caused by the COVID-19 pandemic in 2020 also presented opportunities for the export credit insurance industry to position itself in line with new societal realities and market needs. One of the most significant opportunities to arise from the pandemic is the digital transformation’s acceleration in the insurance market that started over the past two decades. At the onset of the pandemic, the industry underwent rapid virtualization of operations to meet employee and client needs. This progression will enable data-driven transformation across the industry and cost-efficient organizational models in the future.
Besides implementing technology for ICIEC’s Business Continuity Management throughout 2020, ICIEC worked on implementing a new IT System to improve institutional performance, capacity, and responsiveness by digitizing its business processes. This new system will play a crucial role in increasing the volume of intra-OIC trade and the inflow of investment into Member Countries, in line with ICIEC’s 10-Year Strategic Plan. Additionally, the IT System will ensure that Takaful products are easier to access and easier to use. The system will improve ICIEC’s customer service experience through shorter processing times and improved information availability, making ICIEC’s products more attractive to prospective customers.
The increased digitization will bring about transformational changes to the industry by reducing operating expenses, automating internal processes, and boosting revenues. While the effects of the pandemic will be felt for years to come, and considerable uncertainty remains, including lingering obstacles to growth and profitability, there are still reasons to be cautiously optimistic for the future of the insurance market.
Early 2021
The 2021 overall outlook for the trade credit and political risk insurance market remains unclear as the effects of the pandemic still need to materialize fully. However, many of the trends witnessed in 2020 are continuing into the new year, presenting continued challenges and abundant growth opportunities. There is a lot of hopefulness worldwide as vaccines and control measures are slowly starting to have positive effects in some regions.
The uncertainty and protectionism in global trade sparked by the pandemic are poised to continue increasing the demand for trade credit products. The rise in focus toward protecting and mitigating risk from non-payment risks and expanding trade into different regions are becoming major growth factors in the market[3].
In a survey conducted by Trade Finance Global of trade credit members of the International Credit Insurance & Surety Association (ICISA), most respondents anticipate an increase in demand for credit insurance cover in 2021, and growth is expected for political risk underwriters in OECD countries. This survey also saw the majority of underwriters expecting an increase in claims paid, as well as the expectation that payment defaults will rise sharply this year[4]. Pricing is also likely to be affected by the COVID-19 pandemic. New types of covers will likely be developed this year in response to the pandemic, such as the launch of more parametric policies.
While the pandemic continues to dominate the policies and strategies of the insurance market in 2021, we can expect related and unrelated trends to make an impact. Environmental, social, and governance (ESG) concerns will likely take centre stage, focusing on promoting sustainability and the continuing digitization of the industry.
Looking Ahead
The long shadow cast by the pandemic will impact the assessment of future risks and opportunities when looking forward to the rest of 2021 and beyond. For the coming year, political decisions on COVID-19 and climate change will significantly impact risk. The biggest challenge is the ability to prepare for many unknowns as economies struggle to recover and the distribution of vaccines continue across the globe. Even as world economies recover their footing, it is unlikely that the market will go back to the previous ‘normal’ with the end of the global outbreak.
Due to the challenging economic conditions ahead, insurers should adopt strategies and policies to accelerate long-term recovery and growth. How insurers’ respond not just to the impacts of COVID-19 but the longer-term shifts in technology, the economy, and consumer preferences will be critical. Generating continuous innovation in insurance policies, strategies, operations, products, and customer experience could turn out to be the biggest differentiator in 2021 and beyond.
Despite all the uncertainties, the outlook for the years to come still shows growth opportunities. According to the Global Opportunity Analysis and Industry Forecast, 2020–2027, the compound annual growth rate (CAGR) of the trade credit insurance market estimated to grow at 8.6% from 2020 to 2027, and the market value of the trade credit insurance market projected to reach USD 18.14 billion by 2027[5].
The Islamic Finance Market
The COVID-19 pandemic caused many challenges for the Islamic finance market, especially with the current volatility in oil prices and the uncertain macroeconomic environment. Islamic finance also has a much larger exposure to SMEs, microfinance, and retail lending, exposing it to a greater risk of client default or increased claims entering 2021. However, the outlook for Islamic finance remains promising in the new year, as it has proven to be resilient to previous crises due to the nature of its offerings and instruments.
Islamic banks encourage transparency between institutions and their customers, and they continue to provide interest-free services and prohibit unethical and high-risk transactions. In addition, all cash flows are tangible assets in the economy, which makes it very difficult to create unsustainable levels of debt, unlike conventional banking, where debt is created without much of a limit. These principles will likely insulate Islamic finance institutions from the risk of bankruptcy in the coming year, even in the face of so much economic uncertainty.
The impacts of COVID-19 are also creating new opportunities by forcing the Islamic finance industry to adapt to rapidly evolving market conditions and speeding up the pace of emerging trends in socially responsible investing, sustainability, and digitalization to mitigate the impact of the outbreak. There is ample room for Islamic banking solutions to become critical in aiding the recovery following the crisis, aiding in the industry’s growth. The ultimate outlook will depend on the longevity and severity of the COVID-19 pandemic and its effects – particularly in OIC countries.
ICIEC’s Focus for the Year
As a leader in multilateral Shariah-compliant insurance solutions, ICIEC has been working to mitigate the effects of COVID-19 in Member Countries. The Corporation stands ready to unite with relevant partners and continue to grow the Islamic finance industry throughout 2021.
ICIEC continues to serve its mandate of promoting cross-border trade and support foreign direct investment (FDI) by providing risk mitigation and credit enhancement solutions to Member Country exporters selling to buyers across the world, to investors from around the globe investing in Member Countries, and to international exporters selling to Member Countries in transactions for capital goods and strategic commodities.
ICIEC’s promotion of intra-OIC relationships will remain essential in the year to combat the rise of protectionism as a trend in global trade. Many nations turned inward and implemented protectionist policies throughout the pandemic, especially regarding medical supplies and essential commodities. Several ICIEC’s Member Countries, classified as Low-Income Countries (LICs), has been hit the hardest by these protectionist policies. ICIEC will continue to address the effects of protectionism throughout 2021 by facilitating trade among businesses in the OIC and beyond. One such example is ICIEC’s support of the Arab-Africa Trade Bridges (AATB) Program. AATB is a multi-donor, multi-country, and multi-organizations program designed to leverage new trade partnerships, strengthen existing ones, and increase trade and investment flow between the Arab and African regions. ICIEC supports the AATB Program with investment and export credit insurance for Islamic Countries to strengthen the economic relations between OIC member countries.
ICIEC will also continue to support its Member Countries by continuing its COVID-19 funds and initiatives, aiming to mitigate challenges while also delivering development impact. One of ICIEC’s key strategic priorities is to support Member Countries in achieving their development agendas. ICIEC continues as well to support the achievement of the UN’s Sustainable Development Goals (SDGs). ICIEC continues to act as a catalyst for private sector capital to be mobilized and directed towards the achievement of the SDGs, which will have profound positive impacts in the OIC region and the rest of the world as they recover from the fallout of the pandemic. The pandemic provides an opportunity to recover more sustainably by growing economies, job creation, combating climate change, reducing inequality, and improving public health. ICIEC remains committed to prioritizing projects in Member Countries to build a more vital, resilient and inclusive ecosystem.
[1] https://www.oecd.org/coronavirus/policy-responses/trade-finance-in-the-covid-era-current-and-future-challenges-79daca94/
[2] https://www.moodys.com/research/Moodys-affirms-the-ratings-of-five-trade-credit-insurers-with–PR_1000004086
[3] https://www.alliedmarketresearch.com/trade-credit-insurance-market-A08305
[4] https://www.tradefinanceglobal.com/posts/what-does-2021-hold-in-store-for-credit-insurance/
[5] https://www.alliedmarketresearch.com/trade-credit-insurance-market-A08305
