Axis’ Silas: Credit and political risk market faces “increasing complexity and uncertainty”

Michael Silas, head of global credit at Axis Re, responds to our questions on the latest trends in credit and surety reinsurance…

What themes is Axis Re seeing in the credit and surety reinsurance space?

In the credit and surety reinsurance sector, industry conversations are dominated by increasing complexity and uncertainty – a short list of concerns includes the Russian invasion and resulting sanctions, rising inflation and central bank interest rate hikes to correct the trend, and increasingly vulnerable emerging market borrowers.

Firstly, credit and political risk claims notifications emanating from Ukraine and Russia are slowly hitting the market. Estimates of notional exposure – not claims – start in the mid-single digit billions of dollars. As events are still unfolding, it is possible to imagine a worst-case scenario.

Secondly, we are also seeing the unwinding of a multi-decade low inflationary environment, which could bring recession to the US and more likely Europe. This situation isn’t helped by the changing prioritisation of China’s government, which seems to have downgraded economic growth in pursuit of political priorities.

Lastly, emerging market hard currency sovereign and corporate borrowers are coming under stress in servicing hard currency debt (and higher oil/food import costs) from depreciating local currency revenues, at a time of reducing global growth expectations. Sri Lanka, Lebanon and Russia have already defaulted on their sovereign debt.

What do you think the main topics of discussion will be ahead of 1.1 in the global credit and surety reinsurance space?

Inflation from both supply and demand, rising interest rates, a strong dollar and emerging market default expectations, supply chain disruptions and lagging resilience to near-term energy challenges are just a few of the challenges likely to dominate discussions ahead of 1.1. Preparing for and management of all these conditions will be the focus of discussions.

What do you see as the opportunities facing Axis Re in the global credit and surety space?

Whilst we recognise the near-term headwinds, the credit cycle and future instability are inevitable and should be prudently managed, not feared.

In surety, we expect important investments in infrastructure worldwide to support economic growth and employment. We also expect green energy infrastructure to take a key role in European plans to reduce/avoid any future dependencies.

We are excited about the range of opportunities for Axis Re, and we’re committed to global credit as one of our four focus areas in reinsurance. We have established a new global credit team that brings together credit, surety and mortgage expertise allowing for enhanced product offering supporting our existing customers and the flexibility to broaden our customer base (e.g., increased appetite for structured credit and political risk insurance).

Axis Re recently identified credit as one of its key areas of focus, in addition to A&H, casualty and specialty. Why?

Axis Re recently shifted its focus to specialist reinsurance lines with a commitment to A&H, casualty, credit and specialty, and is focused on disciplined growth with our partners in each of these areas. We bring deep expertise in credit and have established a dedicated global team, which includes surety and mortgage.