The Indian trade credit insurance market has been hit by some tough new regulations, limiting the use of trade credit products. Kevin Godier reports.
As GTR went to press, the Indian regulator, the Insurance Regulatory and Development Authority (IRDA), had just issued its first ever guidelines on trade credit products, which state that trade credit insurance policies for banks and factors are to be banned.
This follows a period during which India’s credit insurance industry had been virtually shut down since September 27, after the IRDA banned all companies bar the Export Credit Guarantee Corporation (ECGC) from selling any credit insurance policies until further notice.
The ban followed a build-up of concentration risk at state-owned insurer Oriental Insurance, which has been facing claims reportedly amounting to up to Rs400 crore (US$90mn) on cover granted to Paramount Airways.
Major sufferers in the process during the temporary ban period have been the foreign underwriters operating in the market, which write more than 95% of India’s short-term domestic covers, although technically fronted by Indian companies such as New India Assurance (NIA), Iffco Tokio and ICICI Lombard.
“Domestic Indian insurers have other general insurance lines, and are not so affected by this. The big foreign players – Euler Hermes, Coface, Atradius, Chartis and QBE – have been hit the hardest, and have been lobbying hard for this situation to be resolved,” a broker based in Mumbai tells GTR.
“Only ECGC can continue to write business in India. They are intensifying their marketing, and have the advantage that they have paid a good amount of claims during the recent financial crisis. This is a huge departure and a big source of concern for those dependent on Indian credit insurance,” adds a private sector underwriter based in Singapore. “Before the ban, Atradius and Euler Hermes, especially, had been expanding their business again in the wake of the global crisis.”
Another Mumbai-based broker flagged up IRDA’s “limited awareness of credit insurance policies and how they work”. He comments: “While imposing a ban on the credit insurance product, except for ECGC, they have not mentioned if political risks also come under this ban. The situation is quite confusing and everyone is looking up to the regulator for next line of communication.”
A sentiment prevalent among some Indian brokers and insurers before the IRDA’s announcement in December was that the decision to stop the marketing of all credit insurance policies was a knee-jerk reaction.
“If one company has made a mistake in its underwriting processes, it should be taken to task and proper underwriting procedures prescribed rather than banning the product itself,” says an official who manages the credit insurance portfolio with a private life insurer.
Others have highlighted the regulator’s very real fear of a misuse of banking products in India, both in the light of the role played by banks in the recent global financial crisis, and the nature of the claims to Oriental, which were made by banks which had lent to Paramount.
“IRDA wants to build and evolve insurance products in India,” says the source.
“Their remit is to control the market, sometimes by intervention. In this case, they have come up against a lack of understanding and expertise among Indian firms, combined with a particular fear of banking products being misused, as has happened elsewhere in the world during the financial crisis. IRDA is very, very cautious on all insurance sector links to banking products.”
The big foreign players have been hit the hardest and have been lobbying hard for this situation to be resolved.
According to a third Mumbai-based broker, the roots of the IRDA ban lay in events that took place at the height of the global financial crisis, which saw credit insurers globally tightening up on every aspect of their businesses.
He comments: “The trend included an incident where two of the global ‘Big Three’ credit insurers were not prepared to pay out on claims linked to policies taken out by one of India’s biggest factoring companies, which had used credit insurance to back its entire financing portfolio, but incurred defaults from import factoring business that it had failed to disclose.”
As the global credit insurance industry dramatically reined back its lines, Indian brokers seeking to find a home for existing business began to place this with local insurance companies, led by Oriental and other general public sector insurers, such as National Insurance Company and United India Insurance Company.
“This kept the market going, but was not an honest and responsible approach by some of the individuals involved,” stresses the broker. “None of the general players really understood the product.”
Oriental Insurance reportedly ran into its losses largely because of multiple policies, sold through various branches, providing credit insurance cover on loans taken by the beleaguered Paramount Airways airline.
When Paramount Airways failed to meet its loan obligations, its lenders, including state-owned banks, asked Oriental to make good their loss. “Oriental has a large balance sheet, and was able to meet its obligations,” explains one of the brokers.
“However the claims came from so many different directions that Oriental struggled to cope, so its policyholders then went to IRDA, which in turn imposed the credit insurance ban.”
Oriental has paid a lot of the largest claims from the banking sector, say brokers. However the concentration of risk that it accrued was, by market consensus, essentially a failure of adequate risk management practice.
“The case specifics that led to the problems did involve the concentration of risk at one company – and that was due to a lack of understanding of the product,” the broker adds.
“Oriental did not even have systems in place to understand that the concentration risk was growing out of proportion. Pains have not been taken to educate the market, and everybody should take responsibility – the brokers, banks and fronting companies.”
He suggests that the problems can be traced back to the opening up of the trade credits insurance market in India in 2001.
“Trade insurance started on a fully regulated basis in India in 1999, when Gerling-NCM (now Atradius) was selected to operate with one designated state insurance company, NIA.
“Then the market opened, and Oriental and United and National came in, because of the money to be made in these new lines, when conventional insurance product premiums were dropping by as much as 90%. But they didn’t understand the product, and were often misled by brokers.”
The new guidelines issued at the start of December state that a trade credit insurance policy cannot be granted to a bank, lender or financier. It also states among other clauses, the insurer cannot have the bank as the beneficiary of the claim or have the claim proceeds assigned to them.
The insurer is also obliged to assess the credit risk of any buyer who contributes more than 2% of the total turnover of the policyholder.
However, the IRDA will be allowing all the current products to remain valid until the expiry of the contract period.
One source remarked in email correspondence that “It may be difficult to enforce some of these [new regulations] as they are all a little vague”.
The market will now watching closely how these new rules are implemented to see how detrimental they will be to the development of the credit insurance market in India. GTR