With good risk management foremost on corporates’ minds, and with little difficulty selling their products in the current economic climate, the political risk insurance markets are in robust health.
- Kevin Godier, freelance finance and energy journalist (chair)
- Andrew Beechey, deputy regional manager UK, Zurich Global Corporate
- Charles Berry, chairman, BPL Global
- Joe Blenkinsopp, deputy global head, political risk & trade credit, XL Group
- George Bolton, political risk & credit, ACE Global Markets
- Olivier David, head, special products, credit & political risks, Atradius
- Paul Davidson, chairman and chief executive, Willis Financial Solutions
- Andreas Hillebrand, head of credit underwriting corporate solutions, Swiss Re
- David Maule, executive director, credit & political risks, Gallagher London
- Edward Nicholson, partner, credit political & security risk, JLT
- Ade Onitolo, director, political risk forecasting, Exclusive Analysis
- Peter Sprent, head of global financial risk, Liberty Syndicates
Godier: How is the eurozone bank situation affecting your market? Will business with European banks remain subdued for the foreseeable future?
Davidson: There has been an impact on transactional volume for some time. But it is not a homogenous picture encompassing every single bank in Europe. Some are finding it much more difficult than others.
It would probably be a mistake to underestimate the resilience of some of these banks. They are having challenging times on liquidity issues, but I would not be surprised to see them returning to the fold, with a bit more visibility than they may have at the moment.
David: We have seen new interest from Japanese, and from American banks. So for us the impact has been limited.
Blenkinsopp: Dealogic statistics show a reduction of about 25% in overall trade finance deals being closed, and this is particularly affecting the commodity sector, which is heavily dollarised. The European banks’ major issue seems to be financing in US dollars, but there is certainly appetite from European banks to insure deals.
However, the borrowers are sitting tight and not closing new deals so the number of policies inbound in the market is down overall.
Hillebrand: I think that this situation is changing the market place. If you look at the medium and long-term business in particular, I think that this is an opportunity for US and Asian banks to finally take an important share of the trade and commodity finance market. In some areas, it’s more difficult. On the documentary side you need to have networks, so not everyone can compete with the European banks.
Maule: It’s interesting that the brokers and insurers in our market are hiring more bankers now than in the past. This can be expensive, but I think that it will help the understanding of our product in the banks, bringing a cross-fertilisation of ideas that should be encouraged.
It is positive that we are seeing business now from less obvious quarters, such as Chinese and some Malaysian banks, and some in Eastern Europe, including Czech banks. They are filling some of the gaps left by the fall-off of business from Western European banks.
Beechey: Business is down, but obviously banks are all affected differently. I think the way that certain institutions are approaching the insurance market is very different. Some are being more innovative and creative than others, so it is not a question of European banks in general not using insurance.
Sprent: I think we are going to start seeing those banks that were there traditionally beginning to use the market in different ways. We are going to have to be creative and innovative in the way that we ensure that our products allow them to still use their skills in areas such as structured trade and commodity finance. They are not going to have access to the same levels of liquidity that were previously available, and can perhaps use our market to help attract new sources of liquidity.
Onitolo: One of the things worrying me is the information that we do not have about the European banks.
For that reason, I am concerned that the situation they are in now is likely to get worse. Looking at Spanish banks, there are probably a couple – BBVA and Santander – that are relatively robust. For the rest of them, if you look through the balance sheets, you would see nothing on impaired losses or non-performing loans. I’m worried about a second round of bailouts for the banking sector, which would probably reveal some very dark, hidden sides of the balance sheets.
Bolton: I’m not sure that this would affect the quantity of business that we receive to look at. The Spanish banks are not big buyers of insurance. What your comments say to me is: we should stay away from insuring risk on those banks or their foreign subsidiaries. We have taken a very hard line on European banks as a risk in the last eight months, and we are basically off cover for European banks.
Onitolo: Is there a question about how much liquidity the banks might be able to provide going forward?
Sprent: If Greece does leave the euro it is a relatively small part of the eurozone economy, and so may not have a huge impact on our business. But you would have to look at the knock-on effect on Spanish banks and the banks that we work with in those countries.
And whether or not there is another round of pain that the French and German banks, for example, have to go through as a result of writing down the value of the assets that they have in those southern European countries, which could lead to another contraction in the amount of business that those banks are able to do.
Nicholson: It’s a terrific opportunity for us, because the European banks having a tough time are definitely going to come back. Some already are.
Equally, the Asians, Americans and Japanese are all stepping in, and are looking to the insurance market. If you think about the financial crisis four years ago, the syndication market dried up, and the insurance market remained there as a valued partner, and enabled the system to keep on going and here we are again.
Hillebrand: It’s not easy to manage pricing these days. In the past everyone was competing on the same level. Now, you have European banks trying to pitch for business against Asian banks. What is available from the loan margin to buy insurance cover is often insufficient to meet return hurdles. We decline a lot of business these days because margins offered are simply not attractive. At the same time if you have strong relationships with some of these players, you would still like to support them.
Godier: Is there enough current business to go round in what appears to be an expanding PRI market?
Davidson: There is no question that the universe has expanded from where it was five years ago. In 2008 there was a significant reduction in the volume of transactions completed by Willis, against 2007. Since 2008, the number has gone up every year. This year, by the end of the third quarter, we had exceeded the number of transactions we had executed in 2011.
Bolton: There is more than enough business around, but in no way is there enough quality business. What we are seeing is that there are more people coming into the market, and the deals are just not stacking up. There is a risk profile that even back in our most aggressive days we would have been reluctant to insure.
One of the concerns I have going forward is where we will get our requisite income from, as capacity in the insurance market continues to increase, and everybody has a certain number of mouths to feed. Perhaps that means underwriting transactions that we do not really need on our books at the end of the day.
Blenkinsopp: The other aspect of what we are seeing is a resurgence of interest from corporate clients in pure political risk products, not trade-related, for the protection of overseas assets against confiscation, civil war and so on. I’m not saying that this will necessarily completely fill the gap that has been identified here, but it’s certainly an interesting trend that good risk management appears to be foremost in corporate clients’ minds.
Sprent: It’s never difficult selling our products in the economic environment that we are in, and heading further into. There is a lot of uncertainty about the increased political violence in more unstable parts of the world.
However the balance sheets of the major corporates are absolutely stuffed with cash at the moment, indicating a hesitation on the part of a lot of companies to invest. Nevertheless, there are enormous infrastructure deficits everywhere in the world, which could, eventually, see corporates starting to commit that capital as and when there is less uncertainty.
David: At least there is more credit risk awareness, which is making a big difference for us this year. Not just in Europe, but also in Asia, where a greater education about the commercial risk is happening.
Hillebrand: The current environment forces us to think: ‘What’s next?’ And maybe to invest a little bit more in looking at the medium-term picture. For us, at least, origination was almost too good for a while, with opportunities coming in at a high pace.
It left you wondering if anything would come along that would force us to think harder on how to evolve the model, such as the regions that we want to expand in, and the products that we would use for this.
Blenkinsopp: Also the Asian market is distinctly different from the European market, and the American market is different again. There are regional differences of demand both in terms of the products being bought and in pricing, but also in terms of what risks the underwriters are prepared to accept.
Maule: I think it’s quite interesting that we can now have risks in Western Europe that we certainly didn’t have a few years ago. Even in Greece there are risks that can be underwritten, if you pick the right insured, and the right deal.
I think it’s very silly of some of the insurers, particularly the whole turnover credit insurers, to take the blanket approach and say: ‘We are not going to be covering any new risk in Greece’. Some ECAs are on cover for Greece now, including the German ECA, as other private insurers step out.
Berry: The ECAs want to and need to step back into short-term credit risk in Greece, an area that has been forbidden, because Greece is technically “marketable”.
In terms of sufficient business to go round generally, though, I just look at the range of products that we have, and at the potential markets that we have not developed, and see bags of opportunity. The idea that the marketplace in its current form is too big is not true. It’s just that we need to take our message out to more people across the world.
Davidson: We certainly don’t need to advertise, because the front page of the newspaper does that for us.
Beechey: Yes, people are beginning to recognise the risk and also recognise that our industry’s track record has obviously been very good from the claims side of things. That combination is a very positive thing for the future.
Hillebrand: The insurance market now has a standing that it never had before, because it has paid out claims in the last two or three years. And maybe banks need more support than in the past.
Even many of the big banks that in the past would have said that their syndication market works perfectly without need for insurance, now buy insurance. Some have already recognised that the insurance and reinsurance markets represent a way to diversify from syndication market distribution.
Davidson: And insurers actually represent really good counterparties because they are multi-line and not monoline businesses.
That illustrated itself very well in this crisis, proving the strength of the multi-lines as a reliable partner. So you have this combination of the banks with their reliable distribution issue, the added desire to manage capital, and a world which is self-evidently hazardous in the Middle East and elsewhere. So I agree that this actually is an opportunity.
Berry: But the extent of the opportunity is that there is still a long way to go. I think that everybody around this table and many of the bankers we speak to on a day-to-day basis are persuaded of the viability of the product we are offering to the banking sector. But I still don’t think that our products are generally accepted around the banking sector.
Maule: Although there has been an expansion of the market, what is seen negatively, especially among my clients, is when an insurer such as QBE pulls out, and is replaced by XL, leaving QBE in a run-off situation going forward, which has negative impacts. Compare that to the continuity offered by the German ECA, which has been going for 60 years.
Beechey: Admittedly QBE has pulled out, but these days it’s a pretty stable marketplace. You have a lot of players who have been there for a long time, and as people’s track record continues, that worry from clients is going to lessen. It’s a rare thing people pulling out of our market these days.
Blenkinsopp: Every industry, whether it is insurance or banking, will have players who come and go. In the scope of the overall marketplace, it has hardly been impactful.
Berry: Comparing this marketplace to the ECA market, all markets change, evolve and grow. Part of the education process is to get people used to the idea that change and evolution is good.
Davidson: It’s interesting to talk about the ECAs. In Europe they are facing some quite tough challenges, if you examine credit ratings and sovereign ceilings.
Everybody is looking at this issue from a slightly different perspective, and nobody has managed to remain immune from what is going on in the world. But against all of that backdrop, this market has sustained itself through that period, and by any standard, performed extremely well.
Berry: The ECAs themselves may be looking at change. Going forward, the European ECAs will have different credit ratings, and that is going to put some strain and tension on the traditional ECA system. It’s their problem to work out how they deal with that, but one of the things that ought to happen is a further progress for what might be called the ‘private ECAs’, by which I mean a greater involvement of private insurers in the traditional medium and long-term export credit business.
Maule: There is a regulatory aspect to all of this as well though. For the banks purchasing from ECAs, unless the risk weighting of ECA versus private insurer capital allocation changes, there is always going to be a slight disadvantage for the private insurance market.
Berry: This is changing with Basel III. First of all, the private market’s huge competitive disadvantage around the zero risk weighting of the ECAs is a thing of the past. Many insurers sitting around this room have a better rating than some of the European ECAs today. The underlying issue though is that there is now an uneven playing field delivered by the ECA market to different nationalities of exporters within Europe.
Hillebrand: I believe the trend today is for the private market to take up the role of some of the ECAs, but we obviously have to be willing to accept that business. We do some fairly long business already, but frankly it is not something that we want to do near the same scale as the ECAs.
But there is room to be complementary, and there are already some examples of that, with both multilaterals and ECAs. It is undoubtedly a good environment for the private market.
Berry: I’m in favour of evolution, but there are still a lot of subtle barriers that we need to tackle, some of them purely psychological.
I’m not completely comfortable with the expression ‘private ECAs’ that I used, but the capabilities of the ECAs and the private insurers are very similar, and it helps break down some of the mental barriers that exist in recognising the role the latter can play in the medium and long-term business.
Maule: Wouldn’t you agree that there has been an upsurge in demand for reinsurance of ECAs in the private market? I have even heard that the German ECA has bought reinsurance from the private market on two occasions, which must be positive. And there is quite a lot of willingness among the private insurers today to look at the reinsurance opportunity that simply wasn’t there five years ago, when there was much more antipathy between the two sides.
Davidson: It would be a mistake to think that this market can become like a private ECA. I’m not saying that we can’t play and contribute in the same space, but the motivation and the mechanics are fundamentally different.
The pricing is also likely to be different, but more importantly than anything is that the private market has the ability to discriminate its opportunities in the same country, with arguably similar businesses, in the same sector, which ECAs cannot do.
Hillebrand: Swiss Re already has a dedicated origination function that deals exclusively with multilaterals and ECAs. This is simply because we are absolutely convinced that there is plenty of opportunity in this space. One deal we wrote last year with the Asian Development Bank was publicised quite a bit, and there have been quite a few additional opportunities since then.
Blenkinsopp: You can see co-operation evidenced by private market insurers joining the Berne Union. And not just in terms of reinsurance, but also co-insurance between insurers and ECAs.
Berry: But again, one of the subtle, psychological barriers to the development of the private market in this area is that in the medium and long-term segment of the Berne Union, there are only government insurers. So the industry body is way out of touch with the reality on this particular issue, to the extent that the very considerable medium-term non-payment business undertaken by the private insurers sitting in this room is classified by the Berne Union as investment insurance.
Bolton: I think you will find that this will change in the next couple of years.
Godier: Will expansion by PRI insurers into Singapore and other major business centres gradually take away London’s PRI market predominance?
Berry: I feel very comfortable with the global marketplace that is evolving. One characteristic of the PRI market is that everybody writes to country aggregates, and therefore an office in Singapore has to communicate with its office in London, Washington or wherever.
That means that what we are evolving into is, if you like, a global coffee house. Where it is centred does not particularly matter. Having said that, the Lloyds strategy is interesting. They do not want to have new hubs around the world, but a more international business centred in London and a few key hubs like Singapore.
David: We can expect London to stay the highest centre of expertise for our business. It’s been the case for the past four decades and I don’t see any change in the foreseeable future.
Beechey: The interesting thing about the hubs and new offices is that each is bringing new business and new clients into the market. It’s not a question of business necessarily moving from London to other parts of the world, it is that the pie is expanding.
Sprent: We don’t necessarily want to have offices all over the world. But as long as the brokers are originating new business in places like Singapore or Brazil, this is making the pie larger.
Davidson: It’s not that new, we have been in Singapore for over five years. JLT has been there since 1996. What’s different is that there is now a critical mass of brokers, which has allowed the market to really take off. Local execution has definitely become much more prevalent. What is slightly disappointing to me is that we haven’t managed yet to attract some more regional insurers.
Nicholson: There may be 15 or 16 underwriters in Singapore, but how many of those guys can actually make a decision locally? You can count the people that have the weight and the experience on one hand. One question is whether underwriters are prepared to commit people for the long term, to build their careers there.
Sprent: You need people you can hire and train locally if you want to build local businesses.
Davidson: That is certainly the preference of the Singapore Monetary Authority there.
Maule: That’s what our experience is. We are hiring locally.
Hillebrand: The change of the market’s dynamics from a few years ago makes these trends necessary. Although you want to have a centre of competence, centrally, business can be very different among locations. If you look at the Asian and Brazilian business, it is definitely different from what we see in Europe. You need to build local underwriting expertise to be successful on a global scale.
Maule: Do any of the underwriters here plan to open offices in China, and have a licensed operation à la Coface?
David: For single risk business, we are working quite heavily with our local partners to develop the domestic single situation business in China, and we are confident that it’s going to be successful very soon.
Blenkinsopp: I think that part of the answer to your question lies with the Chinese government’s attitude towards export credit insurance, and whether they are prepared to allow the situation to evolve. At the moment there is a Sinosure monopoly on providing that type of coverage for exports and political risk investment insurance.
Sprent: The only way we can access that business is by reinsuring or co-insuring with Sinosure.
Beechey: We have a licence to write domestic credit insurance in China, although it takes a while to apply for a licence. We have been there for a number of years, and it is a good, steady source of business. It’s a small marketplace but provides business that we would not have seen anywhere else.
Davidson: There is a difference between origination and market development. Singapore has been a phenomenal success, but, as is the case in China, it’s not that easy to replicate in all the places that we’d like it to be, because of the regulatory impediments, which are pretty significant. I can’t see another Singapore-type hub building up anywhere else, for the next 12 to 24 months.
Beechey: There is a process to go through everywhere, whether it’s for a broking office or getting a licence to write business in a country. And you are right, it does take a long time.
Maule: Take another booming market, Turkey. I think that only Chartis and Zurich have gone to the extent of having a licence for business there, but I’m disappointed that ACE hasn’t bitten the bullet on that yet.
Bolton: We are halfway there.
Maule: Some of us in this room that have tried to do business in Turkey have found it a pretty difficult experience, but I think there is a lot of business there that just requires organisation and a bit of selling. Certainly Turkish contractors have been badly hit by their experience in Libya and have maybe learned lessons from that. They are still going to be concentrating on quite hairy markets such as Turkmenistan and Iraq and will be going back into Libya.
David: If we were going to develop our single situation product there, like in any new markets we would need to have the same expectations with insureds’ ability to manage their policy and their risks as we have with German, French or Swiss insureds, for example. The insureds also need to have the right expectations with us, and our products.
Maule: I think that’s an educational issue. It is difficult to get concepts like due diligence across to, for example, a Turkish contractor. But then, 20 years ago, we might have been having misgivings about continental European insurance.
Sprent: Brokers generally have to make investments five, six or even 10 years before anything actually starts to come in. If you look at the Singapore example, it has taken the brokers who went out there early on a long time to generate that income, and that trust on both sides.
Maule: I think there is a lot to be done in Eastern Europe. We have not done anything like the job that we could have done.
Nicholson: We have a very good network in the Central European space, where we have been investing heavily for a number of years. We have some good quality clients there. The evolving global situation means that companies that are trying to compete there can do so on even terms and can sometimes do better than they might have done in Western Europe.
Maule: There are no problems with the regulatory environment because it is all part of the European Union.
Nicholson: The process for us is very much working with the local partners. To get over any distrust on both sides, and make sure that the understanding is there to avoid local iteration of Chinese whispers.
Godier: How far are some PRI insurers pushing into non-trade products to boost income?
Berry: The only important point is that there is a pretty unanimous view across our market that we should be supporting the real economy and people who finance the real economy. That is the important distinction, and I hope we are getting over having to debate whether a working capital loan is trade or non-trade related.
Hillebrand: For us, it is simply a matter of risk appetite and return. We obviously prefer to write business that has one characteristic: low likelihood of loss, or with high recovery expectations in case of a claim. If we are talking about a commodity producer that has no access to capital market, and that has an impeccable lending track record, and is financially solid enough to get unsecured credit, then for the right price we would consider it.
Maule: I think it’s healthy that lots of people in our market are trying to do non-trade business, to expand the product, and Lloyd’s syndicates are setting up in Bermuda and Ireland and places for that reason.
Beechey: There is some very good non-trade-related and trade-related business out there, and there are certainly parts of our market that can write both. I would like to agree that our market is getting over the distinctions, but it may still be an issue in the reinsurance market. I think it is a question of going through that education process with reinsurers and trying to remove some of those barriers that they are perhaps putting in place on their non-trade business.
Godier: How does the situation look in Egypt and Nigeria, where contractual delays are affecting the PRI market?
Sprent: I think the sort of issues we have seen in Egypt, and Nigeria to a certain extent, are exactly what we would expect to see in those types of markets. That is why there is interest in our product. What happens when those events occur is that it makes you again ask questions such as ‘Am I happy with the way that my insured is acting? Am I comfortable that I had the right level of exposure before the problem? Was I getting the right price for the risk?’
The fact that we are talking of problems rather than claims probably backs up the fact that we have the right type of clients and we are looking at strategic, quality business. The commodities that we are insuring are generally things that governments absolutely have to pay for. Generally, those types of problems eventually sort themselves out.
Hillebrand: I agree that it is definitely not a market for people expecting things to go smoothly all the time. The focus at our end is more on the matter of accumulation. You know that some of these entities just move on from refinancing to refinancing.
You know that if somebody were to pull the plug it would be a problem. Ultimately you make an underwriting decision based on how much you can afford to lose in a downside scenario.
David: It does help to have backed the right insureds, with the right behaviour. The companies with long-term interests understand how both their market and ours work. In a partnership relationship we can let them lead us for our mutual benefits in those countries and others. I think it has been a good experience so far, rather than a hard one.
Nicholson: While there may not have been that many claims payments made, that is not to say there is no willingness amongst insurance companies to pay out. I think if things were to take a turn for the worse you would see some fairly prompt settlements.
Godier: Where are the current claims ‘hotspots’?
Maule: The hot topic of one year ago was Libya, but there have been dramatically fewer losses than we were predicting a year or 18 months ago. Most of the potential claims have been turned into extensions, because the clients are going back into Libya and working through their problems.
It was very unpredictable, and could have gone the same way as it has gone now in Syria, which is terrible, but where we have extremely low, or zero, exposure because of sanctions and other issues. What I am particularly concerned about is the contagion effect from Syria into Lebanon, Jordan and perhaps even Saudi Arabia.
Nicholson: I am not sure that there are any real claims hotspots. We did a quick survey of the market a couple of weeks ago and there is very little going on. There are a few small-sized things under the radar, but the underlying theme seems to be that there isn’t a theme. The triggers for the losses or problems that are occurring are coming from left field.
Beechey: I think the market has reached such a size that there will always be a level of claims activity from time to time, coming from a variety of places. In terms of a current concentration, there is not one, as far as I am aware.
Nicholson: 2011 and hopefully 2012 should be good repairing years for the underwriters.
Bolton: I think as the world’s economic whirls continue then we’ll find a lot more problems on the whole turnover side, particularly in Western Europe, the UK and North America, going forward into 2013. And maybe a little beyond that, because the bulk of losses generally don’t occur until you have come out of a recession. I think that will be the hotspot.
Maule: I know that there have been quite a lot of individual credit losses in South Korea, for instance. And others in Middle East markets including Saudi Arabia. That is part and parcel of this business – sometimes you might support a good insured and turn a blind eye to rather opaque financial reports.
Godier: Is Basel III seen as an overall positive or negative factor in generating PRI business?
Sprent: It is probably neutral, in the sense that there is not a whole lot that is new there, and is going to have an impact directly upon us. There are elements of Basel III that will have a big impact upon the banks in terms of further increasing the amount of capital they are going to put aside, and also in terms of leverage and liquidity.
What we can continue to do is support them in terms of reducing the amount of capital through the changes we have made to our products over the years, and the things that we have had to do for Basel II.
Davidson: My impression is that, overall, it should not detrimentally impact us in any way. With an increased capital requirement, the desire to mitigate regulatory capital will continue for the foreseeable future.
Nicholson: It is throwing the focus back on the insurance market again. It has hit the headlines and banks that maybe haven’t looked at it in the past are looking at it now as a risk mitigation tool, which is a positive thing. If there are any tweaks to it, then this could possibly create more opportunity to direct insurance companies to new spaces and to talk to parts of banks that we haven’t been in touch with before.
Bolton: I think Solvency II is probably more of an issue than Basel III. But we are still not quite sure how it is going to impact us. It will probably focus underwriters much more strongly on making sure they have the right return.