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Coface has refuted criticism over the retraction of its limits during the height of the financial crisis. The insurer is now set to review the way it assesses and prices risk in the future. Kevin Godier reports.

A new underwriting model for its bigger clients is being introduced by Coface, one of the world’s three leading credit insurers.

The Paris-based group has become an increasingly fierce critic of the methodologies offered by the major credit rating agencies, and has begun to offer a credit insurance model that will price against risk, based on credit scores calculated on over 60 million companies worldwide and on its own corporate financial ratings, which started life in December 2008.

According to Coface’s chief executive Jerome Cazes, the new underwriting approach “could allow dozens of billions of euros of credit to become insurable”, based upon Coface’s near real-time assessment of its clients and their buyers’ financial standing.

As the model gains traction, it should help restore Coface’s reputation, which, as part of the wider credit insurance industry, faced some criticism in late 2008 as a result of some massive withdrawals of credit lines, as the credit crunch spread at a frightening pace across major European and US industries.

Speaking at the Coface Country Risk conference 2010, held in Paris in January, Cazes told delegates that by venturing outside of traditional credit risk acceptance parameters, Coface can “enhance the resilience of the entities which buy our cover”. As companies globally begin to recover from the downturn of 2008 and 2009, this “will in turn benefit the whole economy”, he argued.

“Credit insurance does not cover all that it should,” stressed Cazes. “The new model will price on risk, based on our financial ratings, and will offer a better explanation of the scores and ratings that inform those decisions.”

Coface has been consulting with its larger-sized customers and brokers regarding the introduction of the new model, according to Xavier Denecker, Coface UK & Ireland managing director. Denecker told GTR that the model would “require from the policyholders end, credit management skills and experience that are more frequent among large businesses than in smaller-sized companies”.

He said that Coface now looks at invoicing bigger corporate customers based on the value and the risk intensity of their risk exposure at any moment. This would suit companies that are deeply focused on monitoring their ongoing risk exposure and able to provide their insurers with new information as and when this evolves.

Denecker underlined that during the credit crunch, “a number of Coface clients made it clear that they were prepared to pay more to compensate us for the additional risks that they would like us to assume”. He said that “as a product the scheme should be implemented later in 2010”.

By embracing this request, Coface is undertaking a significant overhaul of the traditional model of short-term credit insurance. “The trade credit industry entered the crisis with premium rates calculated over a long period of growth and low claims. Since these rates could not be changed contractually, credit insurers acted on credit limits,” Denecker pointed out.

He said that “the real effect of these reductions is less than it seems, because policyholders often held limits higher than they really needed and because of the decrease of sales. However, reductions have without doubt harmed policyholders who have had to turn to other solutions such as asking their clients for advance payment, retaining a major part of the risk in their balance sheets or using more letters of credit”.

Denecker suggested that by applying the new model, and additionally offering its three other business lines – factoring, receivables management and company information – Coface can maintain an offering that gives them an edge over their market competitors.

Coface believes that it is also rapidly overtaking the three big credit rating agencies in terms of credibility perceptions. When Coface unveiled the financial ratings service in late 2008, it emphasised that this would be more reliable and less costly than existing services, claiming that “massive errors” were committed by the leading credit rating agencies, which allowed “toxic assets to be sold all around the world under the cover of a good rating”.

Intriguingly, Standard & Poors (S&P) downgraded its outlook for Coface to negative from stable on December 21, 2009, saying the insurer’s “capital adequacy has deteriorated further in 2009 from already weak levels.” Cazes told a press conference on January 17 that the S&P move was “wrong”.

Maintaining cover

Rebutting some of the widespread criticisms of credit insurers, Coface managed to maintain its cover levels during 2008 and 2009, but is expected to pay for this with its first loss in 60 years when 2009 results are officially announced.

“We were criticised for reining in limits, which appeared arbitrary to some, but we maintained volumes through the crisis at €370bn in January 2008, and subsequently for the next two years, which helped to maintain supplier credit volumes,” said Cazes at the conference. “The price that we paid was €100mn in losses,” he added.

Coface’s pain was such that it received a €175mn capital injection from its parent, Natixis, after a €103mn loss during the first half, and a further undisclosed loss during the third quarter.

Coface had already received a €50mn capital boost in July 2009, but has recorded a 40% net reduction in payment defaults since the second half of 2009, and is confidently forecasting that all four of its business lines will be profitable in 2010. “In the last week of 2009 we were back to the pre-crisis level of losses – and in 2010 we believe that the credit industry will display growth again,” Cazes told the press conference.

Coface has also noted an improvement in credit management performance among corporates. “The bankruptcies from the recent crisis were terrible but could have been worse. In general, corporates acted very well because they were better managed, whereas 10 to 20 years ago the effects would have been far worse,” concluded Cazes.