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Marsh: How IMO 2020 will affect credit insurance capacity

24 May 2019

Global insurance broking and risk management firm Marsh has published a blog entry recommending IMO 2020 affected firms to start preparing for its impact on trade credit insurance capacity:

From January 2020, new International Maritime Organization rules limiting sulfur-dioxide emissions from ships will disrupt the oil industry and global trade. The transition from high-sulfur fuel oil to a lower-sulfur diesel or gasoil could shift demand in the range of 1.5 to 2.5 million barrels a day, according to various estimates. This could outstrip even the strongest growth seen in any year of the oil supercycle.

A sharp hike in demand for low-sulfur fuel by ship-owners, in the face of tight supply, could cause prices to spike. This situation may be exacerbated by increased demand for sweeter crude-oil grades (for example, from European refiners with no cracking capacity). This could mean a material increase in fuel prices. Low-sulphur bunker fuel already costs materially more than the current high-sulphur option so, even without a price spike resulting from possible shortages, the cost of a ton of bunker will increase by almost 50% (based on current market prices).

European refineries are scaling back planned maintenance later in 2019 in anticipation of a surge in demand; a similar picture is also emerging in Asia. US refineries are planning a heavy slate of maintenance during the first half of 2019 in order to avoid shutdown during 2020.

So how will trade credit insurance underwriters react to these changes?

Capacity shortages

Underwriters allocate a certain amount of capacity per obligor, which is purchased and/or reserved by their insureds against a premium. This capacity is finite and, once exhausted, underwriters cannot entertain further requests on a given counterparty.

In recent years, insurance capacity on these types of obligors has been under pressure due to, among other factors:

  • Insolvencies and defaults relating to companies in the bunkering space (for example, OW Bunker and Aegean), resulting in underwriters being more cautious and applying more scrutiny.
  • Lower use of credit insurance lines as a function of reduced fuel prices, combined with stringent solvency requirements on insurers, resulting in the overall level of limits being reduced and maintained at lower levels.

At the same time, more US oil is making its way into Europe, and new participants in the European market may require additional credit limits for European-related exposures – thereby increasing competition for capacity. This will not happen in six months, but may well play out in the longer term (and also in Asia, barring any political setbacks).

The bunker market will also have to factor in the impact of vessels that are being modified by having scrubbers installed (which is not economically viable for all sizes), as well as the use of LNG-powered vessels. In general, with overall bunker fuel prices set to increase – affecting financing needs and balance sheet performance – sellers may require more insurance capacity to cover their open account invoices.

The combination of these factors may result in material capacity shortages. We recommend that credit insurance purchasers assess whether their insurance limits will be adequate, and prepare ahead of time to ensure they can continue their activities uninterrupted.

For companies that do not currently use trade credit insurance, it is also worth factoring in the possible impact of price increases. Such companies could face not just a shortage of capacity, but also competition for capacity from existing trade credit insurance buyers who have pre-existing market relationships and, therefore, more leverage.

Author: Maurits Quarles van Ufford, Senior Vice President, Credit Specialities, Marsh JLT Specialty

Source: Marsh
Published: 24 May, 2019


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