UK-based trade credit underwriters and brokers gather to debate how the industry can improve its image and performance, having faced criticism over cutting cover limits.
GTR‘s first trade credit insurance roundtable was kindly hosted by Chartis at their London offices.
- Andrew Child, head of international team, Aon Trade Credit
- Fabrice Desnos, cheif executive officer, Euler Hermes UK
- Bryan Gibbons, executive director trade credit & bonds, RK Harrison
- Kevin Godier, freeland trade finance journalist (chair)
- Iain Maitland, practice head, trade credit Marsh Brokers
- Rupert Murray, divisional director, political, project and credit risks, Arthur J Gallagher
- Shaun Purrington, regional director, commercial – UK & Ireland, Atradius
- Ewa Rose, managing director, trade credit division, Markel
- Neil Ross, senior vice-president, trade credit Chartis
- Phil Simmons, commercial director, Aon Trade Credit
- Richard Talboys, executive director, political & trade credit risks, Willis
- Trevor Williams, portfolio manager, trade credit Europe, QE
Godier: Is the credit insurance industry in good health, post phase one of the global crisis?
Gibbons: We are definitely seeing that there is an increased appetite from insurers to look at the right new business, and also to review the reduced limit exposures that have been necessary over the past 24 months.
We see that there is a competitive element coming back into the market as well, which hopefully will not disintegrate into the scenario that we had pre-2008, where overall, credit premium rates were too low to support the exposures underwritten.
Murray: The competitive side is very worrying, because there are already rumours about people forcing rates down. On the basis that there is not a lot of premium in the market already, we don’t want to see a return to slashing rates.
The healthiest side of the business is the philosophy behind the non-cancellable limit underwriters, who are supporting the clients’ ability to underwrite their own business, which is important. That side continues to grow apace. I just hope that the industry doesn’t cause a new problem by being too competitive.
Desnos: I think the market is clearly stabilised and we know that the market is growing overall, which means that, despite all the negative press, there is a great level of interest in the product that we are offering.
It is healthy that there is a competitive element, and I think that all sides of the market are seeing increasing trust, and that the pricing level of the market is sound, and supports the level of risk that we see around. There is an opportunity for underwriters to show increased risk appetite and to support their clients, even more so than they would have done a year ago.
Williams: Generally speaking there is evidence of more risk appetite coming back into the market with a willingness to write more limits. My concern at the moment is the lack of new “new-to-market” business coming into the market. There is also a trend of self-insurance from companies.
Rose: We have just entered the market, but the level of claims has clearly tailed off. The claims caused a very large reduction in limits across the board in our industry and as a result companies are self-insuring and prepared to take more risk. We hear anecdotally that there is a lot more cover available now in the market, which is great. We all want to be writing lots of cover, but need to get the right price for that. The two principal issues are trying to expand the market and bring in companies who have not previously credit insured, and also the question of self-insurance.
Simmons: The encouraging thing is that we do have a marketplace now and it’s open for business. Twelve months ago I don’t think there was a marketplace. I do share the concerns on self-insurance, especially in the SME and corporate market sector. At the top end of our portfolio, we have been relatively successful.
Longer-term, we have concerns about the big multinational companies who spend millions of pounds on risk transfer whole turnover products. Not self-insuring, but moving towards a different product which would take premium out of the marketplace.
Godier: What product would that be?
Simmons: Excess of loss, the involvement of captives, bigger risk participation. We have seen that, and although it’s not anything more than a trickle, it does concern me.
Ross: I think the most interesting thing for me is there is now a much wider recognition in the marketplace that there are two very distinct products out there. There is the traditional whole turnover product and the alternative product, providing non-cancellable limits, which is the excess of loss product.
Our business model has stood up very well over the past 18 months. We did experience a significant increase in claims activity, but overall our underwriting experience has been very positive. In the last nine months we have seen a significant increase in new business, and I think there has been a general trend to move towards the excess of loss market. We now have a very mature whole turnover marketplace, where the growth experienced by underwriters has generally been on the back of going into new markets. In the UK, the underlying penetration has not moved on the needle significantly since I joined the industry 25 years ago.
Purrington: The market was under heavy pressure for 12 months, and now it is well and truly back. But the picture is quite mixed. There are clearly some sectors where the insurer risk appetite is high but demand for the product is currently low, and vice versa. You talk about average penetration rates, but when you look at where it is above average, this is in the construction and steel and automotive sectors, and those are the industries that are still very much in a state of distress.
What we have to do as an industry is broaden the penetration and adapt the products for other market segments. So I think that there is a huge opportunity now. The product has been tested and has paid record amounts of claims over a short period of time so it’s a very good marketing position to be in. But there is a sting in the tail.
The Atradius view is that the insolvency figures will rise, because the current figures are artificially deflated, and if you look at how the UK’s business secretary Vince Cable’s budget has been decimated in terms of support for businesses, you can only see involvencies going one way. But overall, Atradius is very positive about the future.
Talboys: Is the industry healthy? It’s healthier than it was one year ago. I’m very concerned about double dip and increased insolvencies. You can talk about government expenditure issues and the knock-on impact onto the whole of Europe. The southern eurozone is quite scary – exposure to governments in default is going to have a serious effect in many southern European countries, not to mention the UK. You talk about claims tailing off, but that is from record levels. We are still seeing quite a flow of claims, although not what they were in last February or March.
I am quite concerned about the trends in corporate expenditure. People are saying, hang on, we spent £7mn (US$10mn) last year, and we need to cut that to £3mn now. That will have a big impact locally for many of the whole turnover insurers, and possibly an impact on the excess of loss insurers. In terms of self-insurance, yes we are losing companies and clients that still have not got the message, which is that a lot of the cutbacks were due to increased risk and lack of data, which was the rationale for the non-acceptances.
Child: On the international front it’s pretty healthy, and we’re fairly positive about it. The concern is that the flexibility and variety of the product needs to expand. Certainty is the key word in the international programmes – the understanding of the transparency of the key covers that people have actually got.
Certainly the non-cancellable product is attractive in that area. I would agree that some companies are obviously trying to scale down their premium spends.
The plus side is that we are getting business coming in for other product ranges, so we are shrinking a bit, and then climbing back to where we were. There are different reasons these days why people credit insure, and certainly more people are aware of the product now than they were 12 months ago, which is on the plus side. I have probably spoken to more CFOs and CEOs in the last 12 months than in the past 20 years. That has to be a positive in some ways. The risks themselves have been highlighted in a way that they weren’t before.
Maitland: Self-insurance is the biggest competitor to all of us. We are seeing levels of business that are going out of the industry and may not come back, however we structure solutions. There are companies that have been buying the product in one shape or another that now won’t buy again, and that is disturbing.
The other interesting thing is that obviously the results for all the insurers have been badly affected, but none of this was due to any weird and wonderful underwriting as far as I can see. Nevertheless, normal underwriting was incredibly difficult. We are still in a fragile space, and it will be very interesting to see what happens over the next few months, and the next couple of years.
Godier: What is the outlook for new claims?
Desnos: We have undoubtedly seen a reduction in claims levels in the last two quarters. There is a very strong question mark as to how long that will continue.
We know that we will see insolvencies increase again, and that the necessary cutback on spends by governments, and the necessary increase in taxes in Europe, especially in the UK, but also in other countries, will all have an impact on consumer spend and growth, which will ultimately create difficulties for a number of companies. Now that liquidity has been restored within the financial markets, it’s probably fair to say that the worst part of the crisis is probably behind us, but we are now moving into a slightly different type of crisis. And we certainly expect to see claims rising again towards the end of this year.
When we talk about the health of the market, we should also point out that none of the insurers have defaulted, because insurers have conducted a prudent strategy throughout this crisis. Insurers are still in good financial state which enables them to continue to offer their protection to their clients and has enabled the market to remain efficient.
Gibbons: We are in an artificial world at the present time in terms of claims. Certainly in the first quarter of 2010, we were expecting a lot more claims than have appeared. I think one of the issues that may result in claim increases is the deferment by HM Customs and Revenue of VAT and also tax payments.
Those start to kick in again from June for the companies that have enjoyed a honeymoon via that deferment. But now there is apparently about £4.5bn (US$6.49bn) sitting out there with about 250,000 companies that have taken the deferment option.
Also, I think Europe is an issue that should concern us all because it isn’t clear what is going to happen there. It will probably get a lot worse before it gets better. I think we are fooling ourselves if we think that the overall scenario and climate is improving for claims.
Purrington: I think we’ll also have to distinguish between the profiles of claims. In the past you would have seen quite a trend towards lots and lots of small claims, which is a symptom of most insurers having issued lots and lots of small policies. But equally, I’d be more concerned about a large claim, on a high-profile buyer that we would all probably recognise. I think that will then trigger another debate about the value of credit insurance. Obviously I cannot name names, but there will be one or two more twists and turns in terms of certain risks that have been very closely monitored by the underwriters.
Simmons: May I just talk about the claims attitude of the underwriting market over the past 18 months? In such an environment, there is the fear that the attitude will tighten up, and that underwriters will look to avoid claims on technicalities. Now that hasn’t happened. In fact I think the service across the market has generally been exceptional – in terms of speed of response and the spirit of the policy, rather than the fine print. So that’s been something to commend the whole market for.
Rose: Do you think we get recognition for that as a market? I think there is a big way to go to convince companies that not only are claims paid, and that despite the reductions and cancellations, an awful lot of business has still been covered, more so now by the underwriters. One additional factor that could cause an increase in claims activity is the amount of debt that has been refinanced. Unless there is willingness among those institutions to change some of that debt – those huge LBO debts acquired in 2006 and 2007 – into equity, then we will see some large insolvencies.
Desnos: It only takes two or three interest rate rises.
Rose: Yes, it’s related to Libor. As that goes up, then insolvencies will be pulled up, as happens traditionally. So I think there is a lot of worry out there.
Ross: I think you’re right. Bank margins have gone up dramatically, but it’s been absorbed, because there has been a very low base rate. I think that when base rate does move, the full impact could be significant.
Williams: But the amount of information that the companies are prepared to give has changed a lot in the last two and a half years. I think that credit insurance underwriters are in a better position than we were two or three years ago, because we have a vastly larger amount of information that’s up to date. So, while there may be a double dip, we are better prepared.
Godier: The industry was the subject of some harsh criticisms during the 2008/09 financial crisis. Were any key lessons learned?
Ross: I think one of the big things that we need to improve is how underwriters communicate with policyholders. I think that was probably the biggest criticism, which was in many cases justified. That is something that we’ve all been aiming to improve upon over the last 18 months and we’ve taken some huge steps in doing so. Many of us are providing new products with much greater transparency about the risk profile on companies and what the underwriters’ view of that is.
Desnos: It works both ways. There is increased transparency from buyers, who are much more prepared to recognise credit insurers as a key stakeholder in their business, and therefore, share information.
On the other hand, I think amongst most underwriters, in our different ways, we have tended to come up with solutions to increase the transparency and the notice of our actions. I think it’s moving both from a buyer’s point of view to a business community view, where we have underwriters all coming together as a result of this experience.
Gibbons: I think the key lesson that has been learned is price. In terms of the market, the product was very cheap because it was regarded as transfer risk, and that’s it. We’ve not been particularly strong in selling what the credit insurance product is all about. The other components, such as risk prevention and information, were not particularly well sold before. I think one of the changes that is definitely coming out from the underwriting market is a focus on greater transparency in their own information and communicating that out directly to brokers, so that the clients do begin to understand the risk better. That’s come through definitely in the last five months.
Maitland: Our profile has always been that of a tiny part of a giant industry. Against that background, we were catapulted very rapidly into the worst possible scenario and trade credit insurance was thrust into the media spotlight.
Desnos: The credit insurance market is a very important and significant part of the economy and underwriters are well aware of their responsibilities towards their clients and also towards buyers. Across all the underwriters, the industry covers close to £300bn (US$432.6bn) of turnover each year (£288bn is the 2009 figure).
We have interest in a large number of the business relationships in the UK, and clearly it is the reason why we came to the fore at the middle of the recession. Why were we negatively painted? I think there was an element of denial about the seriousness of the situation at the start of the crisis and there was an element of shooting the messenger that identified the fact that things were getting difficult.
It is probably also fair to say that perhaps the underwriters didn’t take the time to communicate enough with their clients and to consider the full impact of their decisions in all instances.
Murray: We got bad press because the industry didn’t support its customers when it needed to. It’s as simple as that. And we also didn’t advertise ourselves very well, for example with Woolworths. The banks got stung for hundreds of millions but it was the credit insurers that got slated for not supporting that company. How is it that the credit insurance industry is expected to support Woolies when the banks are not there to do it?
But you don’t criticise the banks because you want to go back to them next week and borrow some more money. So we were an easy target, but we didn’t make it easy for ourselves. I’m sorry, but it was bad methodology by some of the insurers that has led to the industry’s bad image. When a hurricane comes along and blows your mansion off its hilltop in Florida, your insurer pays up, he doesn’t walk away just before the hurricane turns up. I’ve got clients who now accuse us [the industry] of writing limits only when it is safe. And that is where we have a major problem now, this lack of certainty.
Child: You can’t buy insurance on a car burning in the street.
Murray: Not if it’s burning already. But the insurer will pay if the client has bought the policy already.
Desnos: Overall, the credit insurance industry took a large hit and paid significant levels of claims, proof that the product achieved its purpose. But the situation was of an unprecedented scale, and we effectively guided clients towards the right risk management strategy in times of unprecedented uncertainty. It is not reasonable to expect that an insurer will start to effectively insure against anticipated losses.
You cannot expect an insurer to insure a home when there is a bulldozer positioned outside waiting to destroy it. Take that example to a company that was in breach of banking covenants or in need of refinancing at the end of 2008 or early 2009 at a time when no one could call what the banks would or even could do for it, and you probably have a fair picture of the dilemma credit insurance underwriters were facing at the time. Our role is to insure against unexpected events, not to walk into near certain losses.
Gibbons: I appreciate that 2008/09 was an unprecedented situation. I think the big problem is clearly that the transparency behind the reasoning for pulling out of the risk has followed through in the market some six to nine months later, but at the time it wasn’t there.
When clients asked underwriters why a limit had been cancelled and the reply was “well it’s a grade six”, the clients were often unaware what that meant. There wasn’t enough background to differentiate between what was a poor risk that should have been avoided in the first place, versus a better risk that you should be looking to get out of.
Desnos: We were talking before about the health of the industry. Had we not had the response that occurred during the crisis we probably would not be talking about the health of the industry at all. As painful as it might have been, the adjustment that went through our market was absolutely necessary.
Rose: It wasn’t just the credit insurance industry. I think that the banks, and everyone else, forgot that there is risk attached. Everyone became greedy, everyone wrote too much at too low a price. If there is a lesson to be learned, let’s just hope that is the lesson that we have all learned. That there is real risk, and it can come and bite you totally unexpectedly. Regulation will impose some of that anyway, because capital is now at a premium, and will be more so as Solvency 2 comes in. So I think the lesson is – don’t get greedy and don’t under-price the risk.
Williams: Our industry broadened its appetite until one or two years ago, and the industry was perhaps blurring into some other products that were not necessarily pure trade credit. I think a lot of the credit insurers have now gone back to the mainstream of the product. Special risk units seem to have gone out of flavour again.
Simmons: There was a mismatch between the clients’ expectations, and what was being delivered. In the previous three or four years, the message was: “Whatever you want, we can do it, and we can do it cheaper.” This was then followed by the suddenness of the change that was demanded by the economic environment. The problems would have been there anyway at that stage of the cycle, but were magnified by the severity and the requirement to take immediate and difficult action.
Gibbons: The lesson learned is that, now we’ve been through that, hopefully we could react much better going forward in terms of the communication and so on. But at the time, it was so severe. There wasn’t enough resources, and underwriters didn’t have enough people to pick up the phone and tell you what was wrong.
Murray: Unfortunately though, the perception of the users of the product was that the insurers were only concerned about themselves, not their customers. Should credit insurers be making a profit last year and this year?
Surely, insurers’ balance sheets should have been taking a battering, because that’s what the clients are paying for, their willingness to pay claims out.
They should not be making a profit, at the moment, because people perceive that they are only looking after themselves. Nobody expects underwriters to run a bad risk. But before the problems started, insurers were publicising the volume of information that they held about their clients’ customers. Then it was discovered they didn’t actually know a great deal about those customers, and that’s why they suddenly walked away from writing the limits. We shouldn’t be complacent over the view that people have of our product. Companies that have used this product for 20, 30 or 50 years are reviewing it.
Gibbons: Every company out there should be buying this product. The fact that they are not, that less than 5% of UK GDP is credit insured, indicates that the product isn’t right.
The product isn’t right, in my view, because the clients feel that they haven’t got the certainty that you have with any other form of insurance. It’s transactional that the insurer can come off risk when they wish to.
Purrington: The biggest learning point was to adjust from a situation where credit insurance was behind the scenes to front page news. And of course you have the government, ministers, the Bank of England asking lots of questions. So you need to take a really hard look at what your product and service is all about.
Child: I don’t think the industry overall responded very well to the press criticisms. There didn’t seem to be a voice saying, “hang on a minute, we’re actually doing this, this and this”. It was constantly hammering away, one-sided, about the negative side of the industry.
Ross: I think the press didn’t want to hear the positive side. There was a lot of information being made available that was fairly much ignored by the media.
Chartis has had a very positive experience, and I believe we have been successful in developing the product. With our non-cancellable limits, we stayed in there.
Godier: Coface is increasingly emphasising its ratings-based underwriting model. What other models are evolving within the industry?
Ross: There are tremendous opportunities for us as an industry. I think you’ve got information technology and insurance coming together in a way that has never happened before. There is also a bit of an arbitrage at present between what banks and insurers can do, because banks are really structured to provide liquidity, but not really structured to take risk.
With Basel II, and Basel III coming down the road, the emphasis on banks to take risk is going to be restricted, so there is a huge opportunity ahead for underwriters to come up with solutions that deal with financing that will broaden the inclusivity of the marketplace.
Gibbons: I think we do need to see some greater innovation in the product. One area that I see developments in is regarding the question on cancellable limits.
And I think that perhaps the whole turnover industry could consider offering terms on the basis of non-cancellable or cancellable, and charge an additional premium if they are non-cancellable.
Rose: On the whole there has been a lot of debate on cancellable and non-cancellable. To me it’s very, very simple and very logical. If your client is prepared to sell to a buyer, or expects their insurer to support sales to a buyer which is basically insolvent, then we can forget it.
Desnos: We have found that there are different shades of product within the whole turnover area. I think it would be completely wrong to disassociate the whole turnover with the excess of loss.
The main underwriters do have a first class whole turnover product that they can offer, but they can also offer various variations of excess of loss products. All these products respond to different clients’ needs and characteristics, mainly depending on a client’s risk appetite. Communications are already better, and I think you will see more transparency and better communications with our clients, and as time goes on we will see changes in where we deliver the service.
Child: I think the underwriting market has certainly shown more depth and profiling about the level of risks. Most of the traditional underwriters have now got ratings, and I think everyone understands that it’s almost a traffic light formula.
And I think, visibly, that transparency is much easier for clients to understand. I think it’s the insurance premium that is still a bit uncertain in their minds, because it is, whichever way you look at it, a bit of an average algorithm that somebody has come up with that arrives at the premium.
If the product is to evolve, we may need to break that down a bit to understand the science of how the premium is arrived at. If we look at where Coface is coming from, a number of other people are also saying: “Well why don’t we price it on the actual risk, and variations of that?”
Godier: In what ways has the product improved for the end-customer across the last decade?
Gibbons: Buying credit insurance is a specialist purchase. But I do think that there is additional value in the product that we have been very poor at selling to our customers. The original concept was that the underwriter knew far more about the risk than you did, and they kept all that information themselves. As has subsequently been revealed, maybe that’s not the case. Overall we see with our larger clients that they are renewing their facilities now, but there is an underlying intention to buy less insurance going forward.
Child: More and more of the larger clients are saying: “We will certainly renew it this year, but overall our objective is to take a greater degree of risk share.”
Ross: I think we’ve also seen that the bigger the client, the more flexibility in the structures they can accommodate, and we have also seen now that many companies are looking at captive solutions. We have seen a spike in interest on that side, partly because we want to support that, and help to keep that premium in the marketplace, otherwise it could easily disappear.
Maitland: We might just be running away with ourselves there. These sorts of solutions, including captives, will suit the larger company, the multinational and the very large corporates. But there are a lot of companies out there, in the middle range, looking to buy this. And they are looking for an outsourced solution; they haven’t the resources to employ 20 credit managers. They want to buy something that provides them with credit management tools, and that’s exactly what the monolines provide.
Godier: How will Solvency 2 affect future operations?
Rose: I think there will be a huge impact from Solvency 2 on the availability of capital and the pricing. It’s all very early days at the moment, so we’re still to see the true impact of it, but I think there will be a very big impact.
Desnos: It will certainly have an impact. But I guess to the extent that it is a mechanism to make sure there is enough stability and enough capital in the market at all times, it will be overall positive. By raising the bar in terms of capital requirements, it should help ensure that underwriters don’t go too far in terms of their risk appetite capability and should help bring stability in the market.
Ross: I think it will also drive a much greater structure to how people price risk, and allocate capital as a cost. So they need to make sure that those costs are properly covered, and that’s going to vary depending on the structures of the risks involved. So I think it will drive a greater structure to how we underwrite and price risk going forward.
Purrington: I think there are also concerns that the actual measures placed on credit insurers are very draconian and too conservative. This has the potential to increase capital requirements to unnecessary levels.
Rose: What worries me is that there isn’t an understanding within the FSA and the regulatory bodies of exactly what we write and how we write it. And without that understanding I think we might be penalised.
Godier: Reinsurers always provide an industry benchmark. How did the end-2009 renewals go?
Rose: Well I just got mine together two months ago, so there is appetite, even as a starter.
Ross: Capacity has come back certainly, but on fairly tight terms. That is not surprising, bearing in mind what the reinsurers have had to endure over the past 18 months. But we haven’t seen the evaporation of capacity that people were predicting earlier. I think that has been a very positive point.
Purrington: Had the industry not taken the timely actions to adjust the pricing and structure of our underwriting to the crisis, then I think the discussions would have been far more difficult. Reinsurers are key stakeholders within the industry, and I think they are satisfied with what they’ve seen, and happy with the way that most credit insurers are managing through the crisis.
Simmons: After the very difficult end-2008 negotiations, the concerns about 2010 didn’t really materialise in the end-2009 negotiations. I’m not saying that it was easy, but there was capacity.
The reinsurers could see that actions had been taken and the trends were improving. Losses were still high but were at least moving in a positive fashion, the economic environment was improving, if still fragile, and there was greater transparency, more information and more dialogue.
Ross: My only concern is that the capacity is there because many other classes of business are experiencing such soft rates, particularly in things like US property. And so if you have a very bad hurricane season, you will suddenly find that capacity will be seeking higher returns than elsewhere. GTR