Ben Roberts, President of credit and political risk insurance broker Texel Americas, outlines the significant growth and potential in the US credit insurance market as financial institutions become increasingly familiar with the product.
As we emerge from the pandemic and disruption of the last two years, the credit insurance market in the United States is full of great potential. In this instance, ‘market’ refers to the collective stakeholders of banks, insurers, lawyers and brokers, while ‘credit insurance’ denotes the insurance market predominantly covering trade credit risks for financial institutions, rather than the more widespread ‘multibuyer’ credit insurance market.
US activities to date
There has been an active credit insurance market in the US for over 25 years. In comparison to the UK, where the market has grown significantly over the last 20 years, the scale of the credit insurance market in the US has historically been limited in terms of active insureds, insurers and brokers, but this appears now to be changing. There is growth and development within all aspects of the market, and a sense that the product is becoming more familiar to banks across the country.
From both the broking and underwriting sides, efforts to explain the benefits of credit insurance as a tool for banks to manage their exposures, risk and growth, are beginning to help expand the number of institutions using the product. “It is remarkable to see the growth in the Americas credit insurance market over the last decade with certain banks moving from opportunistic buyers of credit insurance to becoming key bank clients who actively use the product to de-risk,” says Lian Phua, Head of Americas for AXA XL’s Political Risk, Credit and Bond division. “Having a larger pool of credit insurance buyers and policies helps to build a market of technical brokers and underwriters, and at the same time, helps to create data points which can be used to analyse claims, pricing and exposures within the product line.”
There are currently close to 20 active insurers providing credit insurance in the US, however roughly a quarter of those have been underwriting there for less than five years. This growth in capacity has, of course, brought in competition amongst the insurers, but clearly there needs to be a regular flow of transactions and banks using the product to sustain the insurers’ underwriting requirements and targets.
The most regular buyers of credit insurance in the US have been limited to a few domestic American banks, as well as US branches and entities of European and Japanese financial institutions. The number of institutions now looking to use the market on a regular basis is expanding.
Both in the US and within the Texel Group’s different offices, our experience has been that it can take a while for credit insurance to be adopted as a frequently used tool for risk mitigation or growth within a bank. The adoption process for banks requires coordination with many different internal and external parties. Most importantly, there also needs to be a clear benefit for a financial institution in using credit insurance compared to establishing risk mitigation or syndication efforts, and this is the area where the market in the US perhaps differs most from Europe or Asia.
Challenges to overcome
Features of the US federal regulation implementing the Basel accords make it difficult for a credit insurance policy to meet the necessary requirements to permit a capital reduction in the insured exposure. Specifically, restrictions on the conditionality of eligible guarantees, as well as a floor on the risk weighting of insurance companies, provide restrictions and limit the regulatory capital reduction for US banks.
By contrast, European banks have achieved capital reduction using credit insurance policies for a long period as the European Basel rules are commonly acknowledged to allow credit insurance to be classified as an eligible guarantee if correctly drafted.
Despite this regulatory topic being one with which the market is very familiar, it is not obvious that the playing field will be levelled for US financial institutions any time soon, so it is likely the focus of the benefits of credit insurance will be on the credit limit management and risk mitigation it can provide.
Additionally, the US credit insurance market still has some reputational hang-ups due to issues at the beginning of the century surrounding political risk insurance. In essence, coverage that certain banks believed they had secured was not in place. These historical issues are in the distant past, however, and the credit insurance market has matured and developed significantly since then. Clarity on coverage is a fundamental aspect of any bank’s use of credit insurance and the claim payment record of the industry is extremely strong.
“The evolution of the credit insurance product and the insurance providers delivering such coverage today are the reasons behind the improvement in the credit insurance market,” says Jared Kotler, Head of Credit and Political Risk at The Hartford. “In 2001, the insurance products available for financial institutions were modest in scope due to limited competition. As more insurance companies and Lloyd’s syndicates entered the credit insurance marketplace in the US, the level of underwriter expertise improved, and the insurance products being offered were updated to provide the robust protection that financial institutions required.”
One key area where the US credit insurance market particularly excels is with knowledge of the Americas and this is an obvious advantage that the US market has compared to other credit insurance hubs. Risks emanating from the US are relatively more concentrated either domestically in the US or across Central and Latin America. Over time, the market has built up significant expertise and knowledge of countries, companies and unique aspects of business in that part of the world. This experience means, certainly from a broker’s perspective, transactions can receive a relatively favourable hearing when being assessed by insurers locally. It is common to find that insurers in the US credit insurance market will be able to support transactions and structures that insurers who only have a London presence may not be familiar with.
“Proximity to a client is important in most areas of business and is not dissimilar in the credit insurance industry. Within our political risk and credit insurance group we find it a competitive advantage to be close to our bank clients in the region as it creates a fluidity in being able to discuss complex transactions with the bank’s deal team,” says Phua.
Finally, in Europe there has been collective action by the insurance market to address regulatory topics that have emerged over the last few years. These efforts have been successful in increasing the visibility of the benefits of the product and representing the credit insurance market.
Given the potential of the US credit insurance market, a similar effort there may ensure the recent progress and positive developments continue, as well as bring together the different interests of stakeholders. The International Trade and Forfaiting Association and the International Association of Credit Portfolio Managers are two industry bodies whose membership have a significant interest in credit insurance and would seem the most appropriate organisations for US discussions to be centred within, however, widespread participation from banks, insurers, lawyers and brokers is needed in these discussions to help the market continue its progress.