Still boom time
Tides may be turning in the trade credit insurance (TCI) market, writes Kevin Godier, with claims rising. Insurers should remain vigilant.
The trade credit insurance (TCI) market would appear in healthy shape, judged on a multi-year run of good performances and the 2006 half-yearly results released by the so-called ‘Big Three’s providers of multi-debtor, whole turnover credit insurance – Atradius, Coface and Euler Hermes.
“Business is extremely good,” says Jerome Cazes, chief executive officer at Coface in Paris, which posted a year-on-year consolidated turnover growth of 10.7% and a 47% loss ratio. “We are quite confident we will meet our growth targets because we are operating in a year when the risk is very low – Coface sees no strong negative signals at present,” he adds.
“We still encounter bankruptcies, such as a German phone company that recently went under – but this is normal even in good times,” Cazes explains. “Also in Brazil there have been some local difficulties, due to a bad crop harvest two years running, which has led to some agro-sector payment difficulties. But this has been limited.”
John Blackwell, senior manager of corporate communications at Atradius, which grew its net profit 8.3%, echoes these sentiments. “We did not have any significantly large claims in the first half. France and the UK saw some increases in claims, but the level recorded was within our expected range,” he points out. “We are anticipating a relatively stable claims environment through the remainder of the year.”
Brokers stress that a classic TCI ‘soft market’s has resulted from a combination of a benign risk climate and the long-standing competition for business between insurers. “It is a good time for buyers, who are faced with keen prices and a good choice,” observes Iain Maitland, managing director, credit and surety, at HSBC Insurance Brokers in London.
When will it end
Could this all change? Perhaps, argues Mark Wyatt, assistant director of risk underwriting at the UK subsidiary of Euler Hermes, where the overall 2006 group target is a net premium growth of between 16-18%.
In the UK, struggling retail and construction companies are generating rising claims levels, while “the Middle East is also a real concern,” says Wyatt, who points to claims emanating from Lebanon, Saudi Arabia and the UAE in 2006.
“These markets are very important to UK exporters and represent excellent trading opportunities. However, the Iranian nuclear issue and the Lebanese conflict with Israel does mean that the region will remain relatively high risk for the foreseeable future,” he notes.
Maitland agrees that “there has been an upturn in the incidence of claims,” citing several high-profile failures in the UK. “Energy and raw materials prices have hurt companies in Europe and the US. Claims are likely to increase and the market will have to move the rates up,” he forecasts.
Global liquidity levels are an underlying problem, emphasises Mike Holley, Atradius’s special products director. “The credit fundamentals of corporates and emerging markets look good on the surface, but if the credit industry gets over-extended and a shock occurs, capacity will shrink,” he cautions.
Whatever credit problems lurk in the offing, the market’s biggest players remain focused on geographical expansions. “In the big under-penetrated markets, US and Canada grew by 30% in the first six months, and China even more, from a very low base,” says Cazes.
Atradius’s turnover in ‘new’s markets grew at a rate of 35% year-on-year. In Asia, it recently opened a regional office in Hong Kong, and will open in Singapore later in 2006. Euler Hermes, for its part, has set down bases in major trading nations such as Australia, India, Russia and Turkey in 2005-06.
Leading TCI players are also escaping their branding as ‘monoline insurers’s by offering additional credit management services, and have begun to expand into securitisation and other forms of receivables financing. Coface’s factoring and invoice discounting product grew by an eye-grabbing 48.6% in the first half, which Coface attributed to accelerating activity in Germany, strength in France and significant contributions by newly launched Italian and UK operations. Receivables funding to UK clients has grown “close to €100mn in just two years,” reports Jon Lindsay, managing director at Coface UK.
At AIG, senior vice-president, trade credit, Neil Ross, points to several new products anticipated for launch in early 2007 “that we intend to differentiate us and appreciably broaden the appeal of credit insurance”.
He continues: “We have also developed with external partners a platform to establish and provide confidence for discretionary credit limits, and continue to expand white-branded products for banks, targeting clients in the SME sector.” Without such innovations, the industry’s revenues will stagnate, he suggests.
At Atradius, a major product tweak in the pipeline for its European clients concerns its excess of loss cover product. “This will be non-cancellable, and cut out most of the previous administration work required where multiple buyers were involved,” highlights Holley.
In the US, a greater supply of non-cancellable policies – notably from AIG, Atradius and FCIA – is now a salient feature of the TCI market, stresses Bryan Squibb, Chicago-based managing director at Aon Trade Credit. “Nobody wants an insurer that comes off risk if the house catches on fire.”
There has been a major evolution in thinking within the US market, where overseas insurers such as Euler, Coface and QBE are now established, says Squibb. “Whole turnover insurance has generally been seen as pointless and, at last, the underwriting coverage is now more in line with clients’s risk perceptions. People are buying key account, multi-buyer and trade dispute cover, the big names are here and writing, and the market is growing 15% per year in terms of new buyers.”
US-based brokers say that much of this trend is the result of a uniquely North American drive towards pinning down ‘trade risk’, as opposed to the market’s traditional separations of commercial and political risk.
“Companies are asking where the risks are in their trade, analysing all the payment default, political risk and supply chain issues, and then asking about their options, which might include credit derivatives to cover corporate insolvency events,” Squibb suggests.
A focus on key accounts, or concentration risk cover, has been accelerated by credit quality concerns over the US auto manufacturers and their suppliers, points out Evan Freely, New York-based senior vice-president at Willis Financial Solutions. “There was a huge demand on General Motors and Ford about one year ago, which has eased a little now.”
Multi-buyer cover capacity has also grown. Zurich, for one, can cover large multi-buyer portfolios of risk, which effectively allow its customers to continue doing business where their country limits have become tight. “The purpose is to generate some additional country limits in Indonesia, Russia, Turkey or wherever else our customers have hit their ceilings,” says Dan Riordan, managing director of Zurich’s political risk and trade credit arm.
US$100mn-200mn credit limits are more common in the US, where “around four or five carriers are willing to syndicate some larger risks,” says Squibb.
Lloyd’s of London is also accommodating, notes Rupert Murray, broking director at Rattner Mackenzie in London. “We recently placed a hefty piece of multi-buyer business into the London market, where the syndicates are willing to offer a package if your top five-to-10 names don’t change,” he says.