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Monday 22 November 2010
Author: Russell Group

The drastic steps taken by the global markets for credit insurance and surety bonds in the light of the financial crisis are starting to pay off report by reinsurance broker Guy Carpenter.

The broker has published its fourth annual Insight from Guy Carpenter’s Credit, Bond and Political Risk Team: 2010 Market Update which has found positive signs as the market is starting to rebound.

John Orchard, Guy Carpenter’s Global Head of Credit, Bond & Political Risk Specialty said: “The global reinsurance sector is still highly important to the behaviour of the credit, bond and political risk sector. While there may be localised deterioration, the broader market likely will continue to perform well because of the remedial steps taken during the period of poor economic performance.

“We believe we are at the mid-point of a typical cycle and are entering a profitable period, and our outlook remains quietly optimistic.”

In terms of the credit market the report found that mid-year 2010 results for the leading credit insurers show strong improvements, as all key insurers in the class enacted core underwriting plans to turn around previous results.

It added the general success in avoiding severity losses underscored the sector’s primary challenge in a downturn – reducing and avoiding attritionallosses, however there remains concern that subsequent easing of underwriting parameters could continue without adequate regard for the prevailing downside risk. The report added that Profit fell during the peak of the downturn for the key mono-line credit insurers, but bottom line results were not catastrophic.

In terms of the surety classes overall, the sector continues to show significant growth potential, although reinsurers are concerned that the market has yet to experience the true extent of losses resulting from the economic downturn, added the report.

It said growth potential exists in specific areas, as infrastructure projects remain a priority in many countries. Power facilities continue to be a major source of activity, and mining projects are slowly returning to market. Governments may also provide further short-term, limited impetus by creating work for the private sector.

However, the sector’s growth potential is balanced by challenges in the non-construction bond segment. Customs and other legal bonds continue to face the threat of reduced trade activity, potentially harming the financial status of importers and logistics companies.

In terms of reinsurance the report said the reinsurance community is generally concerned that bond insurers have not yet experienced a downturn due to the longer tenors of the underlying exposures.

“If reinsurers are correct, meaningful losses will continue in the sector, with pricing/structures likely to reflect this development into 2011,” the report added.