Demand for credit and political risk insurance (PRI) in the Asia markets is rising as the region’s economy improves. But commercial risk-taking appetite will have to increase to ensure recovery is sustainable, argues Kevin Godier.
For Asia, 2009 began with the hangover of 2008, manifesting most notably via high lending margins and queues of empty container ships in Hong Kong and Singapore, says Peter Gilbert, a broker in the political risk insurance (PRI) team in Newedge’s Hong Kong unit.
“But as lending margins fell in the second half of the year, the number of container ships sitting at anchor dropped accordingly. 2010 has seen a marked increase in the amount of deals and an increasing willingness to do more business from the banks,” he notes.
Indeed, “the first quarter is looking like one of the busiest that we’ve ever had”, says Julian Hudson, regional manager, political risk and credit, at ACE Asia Pacific. Hudson stresses that demand is “across all lines – not just PRI in Vietnam, for example – and is mostly bank-driven, which shows that banks are looking again”.
According to Jeremy Hampshire, managing director at Trade Line brokerage based in Hong Kong, “we are seeing a slight upturn in the sense that people are saying business will be the same or better for 2010”.
Compared to 2009, the company expects at least a 15% increase in their business. “But the big question is the sustainability of China’s recovery. If it doesn’t continue, there could be a downward effect later this year that will affect businesses around Asia, Europe and the US,” he forecasts.
At Chubb, Asia Pacific head of political and credit risk, Kyle Williams, agrees that the extent of the upturn is difficult to judge.
“The flows might be similar to last year – we are certainly seeing a continuation of the trend where trade finance banks are looking to hedge into our market. De-leveraging still appears to be the key driver, as banks are trying to get on top of some outsize counterparty exposures,” he says.
David Anderson, senior vice-president and regional manager for Zurich Asia, is similarly bullish. “We are seeing a dramatic increase in inquiries as trade volumes increase, and at the same time insurance has gained significant headway as a means to help banks de-leverage,” he asserts.
Anderson underlines that higher pricing more than compensated for lower volume in 2009. “We expect pricing to remain fairly hard through 2010 as we confront the risk of sovereign defaults, asset bubbles in markets like China and Vietnam, as well as a fiscal stimulus hangover in 2011”.
One major problem can be found in the low business appetite within the trade risk community itself, believes Mark Cooper, managing director at the Hong Kong-based TFC Brokerage.
“There is a huge need for additional trade finance and insurance support for this region. The world’s new economic growth is coming from the trade flows driven by China, India and other ASEAN markets. Orders are coming in, restocking is ongoing and manufacturing is recovering, but will dry up if, as is happening now, the demand for support is not met by insurers and banks,” he says.
He continues: “Manufactured goods exports are beginning to pick up from Taiwan, where there are some sound companies with no claims. The difficulty is finding the facilities to meet the exporters’ needs.”
Cooper argues that “a dearth of commercial risk-taking appetite, in terms of underwriting country business and understanding trade flows”, is being masked to some extent by large volumes of banking business being handled by export credit agencies (ECAs) or supported by other forms of government subsidy.
One area where risk aversion is especially acute, and very visible, he highlights, is in “the paucity of bonding facilities offered by banks or insurers” following some significant losses in the Korean shipbuilding industry.
He comments: “Even the ECAs are cutting back, by becoming more transactional and tightly controlled, while the private market places so many caveats in the shape of country limits, the insured’s trading record, deal size, structure and so on. TFC Brokerage is mostly seeing conservative balance sheet underwriting.”
Hampshire at Trade Line sums up the paradigms: “The situation was formerly one of supply, but less demand. Now, demand has increased, and supply has tailed off – some business that could be placed 6-12 months ago is impossible now.”
He observes that retail and electronics companies “cannot get insured at any price at present”, noting that two potential Trade Line clients in the retail sector were recently declined renewal terms by whole turnover insurers. However “for one, we were able to place elsewhere and increase their bank finance moderately at the same time, though at a higher price”, he says.
Regarding tenors, “any transaction with credit terms of above 180 days is going to be very difficult or expensive”, says Mark Thomas, also a Hong Kong-based broker with Newedge. “Commercial bank letters of credit (LCs) are not popular, following the lessons learnt in 2008/09, particularly in Kazakhstan.
“China sub-sovereign risk is tough, as is unguaranteed Vietnamese state-owned enterprise payment risk and long term off-take risk on PLN (the state power utility) in Indonesia. Open account structures and new or innovative structures will not receive the same reception that they might have before the credit crunch,” he emphasises.
Rates have inevitably been hit. “Private obligor payment risk has seen very substantial rate increases given losses to the global portfolio and increased reinsurance costs. PRI has seen smaller increases which vary by country,” says Newedge’s Gilbert.
Trade Line’s Hampshire paints a more detailed picture. “The average premium rise has been in the 25-40% range, with some up to 300% – or exceptionally in one case we know – 400%, which was an overdue correction. At the same time, we have completed renewals at 0%-100% or introduced other terms and structures, such as an aggregate first loss into policies to minimise premium spends, or splitting business into ‘mini-portfolios’. As a broker, you have to use every single idea that contributes towards the best solution.”
He predicts that increases in single risk premiums will continue, but flags up the beginnings of a fall in credit and political risk rates in India and China. “Thailand and Indonesia are going the other way, and the pricing for Philippines is stable.”
In terms of credit and country risk demand, Indonesia tops the list, followed by Vietnam, Philippines and Thailand.
“There has also been a significant increase in the last six months in India, delivering questions about how much business insurers can take on in different trade sectors,” comments Hampshire.
“For Indonesia, underwriters don’t want all of their exposure in palm oil and coal and so on.”
He adds: “China is fairly high on the credit risk side, but not for political risk. There is next to no chance that the Chinese government will pull down an exchange transfer barrier, whereas the credit risk is that companies in China are going bust all the time, which produced a couple of big claims in 2009.”
China’s problem sectors, says Hampshire, “are those that you would expect – toys, garments/textiles and car manufacturing”.
Anderson points to electronic components, including semi-conductors, as the most promising sector for an upturn in requests received by Zurich.
“Credit risk is asked for, mainly on US and Taiwanese buyers,” he says. “We are also seeing political risk as a continuing issue for clients. Venezuela and Thailand are obvious worries for clients, and the Indonesian coal sector has some regulatory issues.”
In terms of trade flows, all players canvassed by GTR point to coal. According to Williams, Chubb is “maxed out” on coal transactions from Indonesia, spanning several large projects and encompassing “everything from PRI to structured trade credit cover for equipment imports”.
“The coal deals we see are primarily out of Indonesia, and some from Australia – and iron ore is also busy,” says Hudson. “One country that is moving onto the radar is Cambodia, where we have seen at least five deals this quarter, more than in the last three years together,” he says.
“Cambodia has lots of infrastructure needs – there are a slew of ports, roads and bridge projects coming down the pipeline,” notes Cooper, whose group company TFC Capital has an in-country office in Phnom Penh.
Other demand includes some quite surprising countries, Williams says. “Aside from traditionally strong Asian economies, such as Korea, Thailand, India and China, we have seen more unusual trade flows into Philippines and Papua New Guinea. Also, after its IMF support, Sri Lanka is on the map again, in areas such as fuel imports and foodstuffs. Vietnam is not especially active now, but export deals were closed last year to various markets featuring soft commodities such as rice.”
Gilbert at Newedge remarks that essential commodities like food, coal and oil are still popular, often on a pre-finance basis, and are still finding capacity, especially for deals to the Philippines.
One highlight in 2009 included Newedge closing the first PRI placement involving the extraction and export of uranium. “The policy conditions included breach by the host government of the requirements of the International Atomic Energy Association and of the Treaty on Non-Proliferation of Nuclear Weapons,” he explains.
On the project side, Gilbert points out that there is still a big requirement for power in the Philippines, Indonesia and Vietnam among other Asian countries. “However mining projects are fast catching up as China’s demand for raw materials continues.”
This should suit most of the insurance providers singled out by Thomas as having been very busy in Asia during the last year. The list comprises ACE, Beazley, Chubb, Coface, Kiln and Zurich. “Due to the massive credit losses sustained from the financial crisis by both banks and insurers, appetite is currently keener for political risks than for credit,” he says.
“Traditional trade credit underwriters are struggling to look at new business – some of them have said they wrote no new business for six months last year,” Trade Line’s Hampshire concurs. “Whereas players like ACE, Chubb and Zurich are seeing a definite increase, a higher deal flow.”
He adds: “Atradius, Euler Hermes, QBE and Coface are all saying that they will still be selective as they have taken losses, but will be more open to new business as compared to 6-12 months ago.”
Hampshire also flags up the influx over the last two years of underwriters representing Lloyd’s syndicates such as Talbot, Kiln, Beazley and Catlin, which have expanded the overall risk-taking capacity that brokers can assemble in Hong Kong and Singapore to as much as US$300mn.
“They are assuming credit risks and political risks, in a manner not dissimilar to ACE and Chubb, but sometimes more conservatively.”
Reputations made and lost
Williams at Chubb argues that insurers have watched banks winning and losing reputations during the crisis period. He comments: “The global downturn has seen a few strong banks, including Deutsche Bank and Standard Chartered, emerging as clear winners as others have scaled back on liquidity.
“The best banks are disciplined users of all risk mitigation markets, and have realised the value of the structures in our markets, by getting stickers on warehouses and sitting down with the various counterparties.”
More importantly, says Williams, has been the insurance market’s demonstration that it can function as a very credible tool to manage risk. “The last 6-8 months have seen the critics silenced, as big cheques have been written.”
Zurich’s Anderson acknowledges that 2009 was a “rough year” for claims, in which Zurich paid out over US$130mn globally.
“But we underwrote consistently throughout the crisis, managed to achieve double digit premium growth, and kept in place our US$150mn and US$50mn ceilings for project and credit risk moving forward. Now the new claims are down to a trickle and we are in position to handle increased volume.”
Anderson continues: “For the market in general, we are hearing that reinsurance renewals have progressed pretty solidly, with little drop in capacity. Some credit insurance players will be constrained in terms of tenor and structure, particularly on the single-risk credit side. But, by and large, the insurance market has survived the crisis exceedingly well.”
TFC’s Cooper is adamant that “insufficient recognition has been given to the effectiveness of the specialist insurance market”, citing the industry’s steady payouts of large claims, its support of restructurings and provision of capital at a time when banking markets have devolved. “A banker client told me recently that a claim for his bank, which had been paid in 11 days, saved his job,” he concludes.