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Political risk capacity dropped marginally year-on-year as geopolitical pressures began to bite, bucking the trend for growth seen in recent years, according to WTW’s capacity survey for the credit and political risk insurance (CPRI) sector.

But transactional trade credit insurance capacity jumped by 17% during the same period, with total notional CPRI capacity per transaction continuing to grow as well.

WTW’s latest survey of 59 CPRI insurers was conducted in January and released this month. It covers notional maximum line sizes and tenors available per transaction for three core products: contract frustration, transactional credit for trade and non-trade, and political risk.

Total political risk capacity dropped 1%, from US$3.94bn to US$3.89bn, compared to a 15% increase the year before.

Growth was seen both in transactional trade credit capacity, which grew from US$3.04bn to US$3.57bn, and in contract frustration capacity, which rose by 4%, from US$4.05bn to US$4.23bn.

WTW also reported a 35% increase in enquiry submissions in 2023.

The decline in political risk capacity is not “significant”, Stuart Ashworth, head of broking and market engagement for the UK, tells GTR.

“To get a 1% decrease in the available capacity for PRI, you only need one or two markets to pull back slightly. Markets have their own momentum, and if the momentum has been building up over a period of time, it will take a little bit of time for that momentum to slow,” he explains.

“Insurers may say, let’s get the capability because there could be opportunities that arise out of the world being more challenging. If there’s a riskier landscape, people may be more inclined to buy cover. But then as time goes on, that short-term opportunity might be replaced by long-term concerns,” Ashworth says.

“What will be interesting is looking at what happens in 2025 – will we see things flattening out? Or are we going to see a further decrease in the available capacity? I suspect it will be the latter,” Ashworth adds.

Claims were “relatively benign” in 2023, WTW says in its survey, with around three-quarters of CPRI claims stemming from Africa, followed by Europe and then Asia.

Sovereign losses reached US$21.7mn, covering claims relating to the defaults of Ghana, Sri Lanka and Zambia, while political risk losses rose to US$6.9mn.

Geopolitical headwinds are continuing to funnel CPRI capacity away from emerging markets and towards developed countries in “a market-wide flight to quality”, WTW says.

For the 44 respondents who gave details about the countries they are most exposed to, the US and UK made up 37% of votes, with the overall proportion represented by developed markets rising to 55% if Canada, Singapore, Norway, Switzerland and EU countries are also taken into account.

This explains the hike in transaction trade credit capacity, WTW says: “If your target countries are AAA to AA rated, there are limited opportunities for contract frustration risks so you need to focus on credit exposures.”

In terms of different types of transactions, the insurers surveyed had most appetite for borrowing base finance, project finance and revolving credit facilities.

Respondents were more or less equally spread from lots of appetite to no appetite at all for supply chain structures, while significant risk transfer, margin loans and net asset value financing were met with least amount of appetite.

The broker also notes that developed world exposure is appealing due to the increase in available structures and products.

“Lenders are becoming increasingly nervous about emerging markets, which means they’re putting more of their capital into the developed world,” Ashworth says.

Insurers are still entering emerging markets with the aid of multilaterals, though, WTW says.

The overall growth in capacity has been driven by both current market participants boosting line sizes and new entrants coming in.

Ashworth says the new entrants are generally not competing across the full spectrum of products, but developing their own specialities within the market.

“They may go for slightly more structured products, or projects which have an environmental angle. So there are a lot more participants coming in, but each one is trying to carve out their own niche space in the market,” he says.

The top industry exposures this year were led by sovereign risk, followed by financial institutions and oil and gas.

WTW notes this could indicate that where insurers are entering emerging markets, “they are restricting themselves to sovereign exposure and avoiding emerging market credits”.

Market appetite for oil and gas, renewables and data centres is high, while the majority of insurers are open to underwriting the metals and mining sector but remain cautious.

“The portfolio’s growing and the number of enquiries are growing. Insurance is being flagged up by a number of industry trade bodies as an important way for banks to mitigate and distribute risk,” Ashworth says.

He adds that the insurance market as a whole is in a relatively strong position, particularly with the upgrade of Lloyd’s of London, whose financial strength rating was boosted from A+ to AA- in December last year,

“In a world where banks are looking for capital, insurance companies becoming stronger really helps the cause. We expect to see the market continuing to grow over the next couple of years,” Ashworth says.