GTR recently brought together 10 well-known brokers and insurers in London to discuss some of the more salient trends and issues in the trade credits and political risk insurance industries. With these markets seemingly poised for a turn, as the financial market events of 2007 begin to bite into risk perceptions globally, the talk around the table provided a series of revealing insights into how this business is being approached.
Roundtable participants
- Charles Berry, chairman, BPL Global, London
- Joe Blenkinsopp, head of London Markets team for Coface in UK
- Kit Brownlees, managing director, political, project and credit risks, AJ Gallagher, London
- James Cunningham, head of Marsh political risk team in London
- Peter Jenkins, senior underwriter for Beazley syndicate, political risk and credit, London
- Rupert Morgan, partner, trade and political risks, First City Partnership, London
- David Neckar, executive director political and credit risk at Willis, London
- Neil Ross, head of AIG’s trade credits division in London
- Paul Sanders, AVP, Zurich EMS, London
- Andrew Underwood, head of political risks, Hiscox, London
- Kevin Godier, freelance financial journalist (chair)
GTR: What has been the most significant, interesting or challenging market event or trend for each of you in 2007?
AU: Lloyd’s revised the regulations for trade credit insurance and contract frustration (CF) insurance. Sometimes insurers make changes to their products that seem huge to them, but actually to everyone else are not huge. I think we need to listen to our clients more, embrace change and not be afraid of it, because product development is a job for life, not just an event that happens every 10 years or so.
PS: For ZEMS this year, one of the most interesting developments has been the development of a nascent customer base across emerging markets. We seem to be picking up more and more inter-emerging market trade as we are rolling out our office network.
JB: For Coface UK, the most interesting market trend has been the continuation of the highly competitive nature of the whole turnover trade credits business in the UK and the emergence of us as the only one of three major credit insurance underwriters able to offer trade receivables finance, as well as insurance.
NR: The growing presence of Basel II. Although it hasn’t impacted most of the banks yet, we are already seeing significant changes and our customers are telling us that they’re seeing changes in appetite from the banks now they are dealing with Basel II. So what we are trying to do is align ourselves to help support trade finance more effectively going forward.
PJ: I’m slightly off the beaten track here. The most interesting thing was seeing the queues outside Northern Rock. It’s a symptom of the ongoing turmoil in credit markets. We don’t know what the outcome will be yet, but that, more than anything else, is going to be the thing that influences what happens in 2008.
KB: As an international broker, we have seen much more increased competition from certain export credit agencies (ECAs). We’ve tended to be rather dismissive of their performance, but are finding that ECAs such as Nexi, Sace, EKN and ONDD are now providing a more aggressive approach to both short and long-term products, in areas such as local content rules and pricing.
RM: I’d point to the relaxation of the CF rules, which Andrew touched upon, and to the ongoing fallout from last year’s resource nationalism. Also the emergence of yet more political risk markets chasing the same business.
JC: The most challenging and overriding trend has been how to successfully and profitably run a business effectively in what is a very low margin and low premium rate environment. I think that this affects our clients, the brokers and the underwriters. That’s maybe about to change.
DN: Two things. First, an underlying movement related to the Basel II position. Our market product was previously a rather rough and ready product, and is now being tailored to fit into specific transactions, and to be monetised so that it can be effectively treated the same way in syndication and other alternatives.
If that tie continues, it’s potentially a huge opportunity for our markets, given the way that derivatives have grown. Of specific events, I feel that the sudden twist occurring with the sub-prime markets is going to raise questions in many different places that will have a big impact.
In Hannover, Zurich and Munich, there will be questions from reinsurers about what is actually going on, and whether margins should be tightened. An event such as the Sonangol syndication launch just before the sub-prime crisis – where it was both very cheap and also very difficult to find cover – may come to be seen as a turning point.
CB: I’d go with the credit crunch. My feeling is that this is the beginning of a long slow motion train crash in the financial markets, which is beginning to impact in emerging markets.
In mitigation of that, I do think that our PR market – compared with other financial markets – will probably escape relatively lightly. This is because so much of our activity is so close to real economic activity in primary sectors of the economy. There are aspects of this which could be very good for our market – but I do see this running on through the whole financial system.
GTR: There have been a series of good underwriting results for the past few years in your markets. Is there any hard supporting evidence that the very benign risk climate is now turning around?
PJ: Most of the evidence so far in terms of the credit crisis is really anecdotal. It’s very difficult to actually point to hard and fast numbers. Within the market there are various LCs with various financial institutions giving some indications of price improvements on some of the underlying mechanisms there.
From an underwriter’s point of view, there have been a couple of cases where somebody has come in, and I have said -‘you have really got to be joking at that price – we are talking double that price for short -term 180-day paper risks’. They respond that there are clients trying to offload things into the market, where they are clearly desperate get it off their balance sheets.
KB: We’ve noticed an increasing disparity between credit risks and state/public buyer risks. The public buyer risks have still been lowly priced, and just recently the credit risk rates have started going up.
RM: From an investment, rather than a trade perspective, I would question the idea of a benign risk climate. You cannot overlook the situations in Bolivia, Ecuador, Venezuela and so on, which is anything but benign.
JB: If we’re talking about the credit crunch, it’s important to know where it will most likely hit, because there are many very highly leveraged companies out there. It won’t take a lot, on the evidence, for this to become very apparent quite quickly, when credit pricing does go up and availability for these type of companies dries up. It could mean that a few big casualties will fall over and we are being vigilant in this area.
NR: I’ve not seen any real hardening of the rates on in the whole turnover credit underwriting market. I think, historically, that this market has been very unresponsive to the changes in economic circumstances until the claims start hitting home. I’m hoping that there will be a change, but we’ve not seen it yet.
PJ: There will be a lag in any pricing turnaround in our markets, because we are in a situation where there is relative over-capacity in many traditional areas of the market, such as CF and PRI. For medium-term credit business the capacity is much tighter, so the lag will be shorter.
PS: We’re already seeing price increases in certain markets, as the margins go up on the banking business.
JC: I think one of the interesting concepts from the last year has been the relationship – and difference – between the banks pricing and the insurers’s pricing. What we’ve seen is that as bank margins have come down, specifically the pricing in the comprehensive insurance market has also come down, within a set ratio. I think what we’ve started seeing more recently is the beginning of a stage where the insurance market was unwilling to drop by quite as much as the banking market.
Those signs were there in the summer, in some of the comprehensive cover on trade-related assets.
AU: When we talk about price, I think some insurers have got very lazy. I think they have got used to charging x% of the bank’s margin, simply holding the coattails without really assessing the rate that they want themselves.
I think actually what we have seen recently is margin plus pricing, so actually the insurer has said I don’t care what the margin is, our minimum pricing for this is x, and regardless of whether that is 100% of the bank’s margin, we want to achieve that sort of price.
So to me that’s an indication that demand is still great on certain names.
GTR: Where is insurance capacity very tight, or failing to meet demand?
KB: Russia, Turkey.
PJ: Certain aspects of Nigeria.
AU: I think the thing is that things are constantly changing, so demand is constantly shifting.
PJ: We were all full on China and Brazil three or four years ago. I think we all now have a reasonable amount of capacity for both. In terms of Russia, Turkey, Ukraine and Belarus, especially Ukrainian banks and Nigerian banks, the market is now pretty full across the board.
JC: In the same market curve and context that Andrew mentioned with the banks, I think we have also seen insurance markets becoming very flexible in meeting the needs of financial institution clients, by going from direct trade-related to quasi, or non-trade related business with banks.
I think there is a very clear line, though, between doing trade and non-trade related business, and I think that’s a business, regulatory and underwriting issue. Essentially, I think the market has probably gone close to as far as it’s going to go in the mainstream market. I don’t know how many insurers here are prepared to write non trade-related deals, but probably not many of you.
CB: Certainly, compared to a few years ago, rules are no longer the constraint on what we can do. I know it’s only symbolic, for lots of people who aren’t in Lloyd’s , but the Lloyd’s rules have been relaxed a lot, on any interpretation. There is a growing activity in non-trade related business.
Everyone is still, quite correctly, looking at structure, but if there is sufficient structure so that people want to write it, on the whole the constraint is now purely appetite, and reinsurance appetite.
NR: One of the changes we see often is that in many countries the legal infrastructure is not well established and your ability to take recourse is very limited. That drives appetite as well. Were there to be an economic downturn, then you know it will be very difficult to get satisfaction over some of your debts.
CB: That’s a real underwriting constraint, which is good, and not an artificial constraint.
GTR: Is there any sign at all that the non-US market could open out more to Iran in the near future?
RM: I think there is still appetite for the right investment risk in Iran, whatever the right investment risk in Iran might be. Not up to the level you might expect in other markets, but you might get US$100mn for the right risk, with the right ingredients. The market is not shut.
PJ: It’s not necessarily an issue of whether there is capacity for Iran. There is Iranian capacity out there, but for any underwriter, the maths would only add up where the probability is that a risk can survive an American strike. A lot of markets have priced the risk in as being the risk of a limited US strike, but it makes no rational sense to the Americans to do a limited strike.
If they are going to strike, it has to be a big strike, almost a regime change strike. A surgical strike just delays the nuclear programme, and so from the Americans starting point of Iran having a bomb being unacceptable, doesn’t achieve the aim. The question would be whether one can underwrite around that reality with a premium calculation.
GTR: To what extent is premium calculation the issue – and to what extent the repercussions of the Ofac’s stance in the US?
DN: I think that is a major regulatory constraint, particularly for insurers and brokers that have any North American or US ownership. Both from a regulatory point of view and from a market perception point of view, there is a problem with Iran.
JB: It’s linked to reputational risk issues as well. If you are perceived to be supportive of a particular activity that appears on the front of the newspapers, that’s not a particularly pleasant place to be.
PJ: And its not just about Ofac and what the formal legal requirements are – the last 12 months have seen huge US political pressure on institutions and other regulators to do what they can to shut down other Iranian-related flows.
KB: Burma is also rather interesting now. We’re an American broker anyway, so cannot go there. But for those who aren’t, just how far are you prepared to go in insuring or placing a Burma policy, when it’s a reputational risk
GTR: Where are reinsurers standing on the next set of renewals?
PS: We’re looking for a favourable outcome. Zurich is looking to increase our limits to US$125mn. The proof will be in the pudding, but that’s the expectation. I think that for operations with a good track record, there should be few problems.
AU: I think that reinsurers are looking for non-correlated classes, and political risk as a niche area is one of those non-correlating classes. So I believe there is still demand, and our industry’s results have been looking very good for the past few years.
NR: We just renewed our treaty and I think we found the reinsurers to be very supportive. They have seen a very good run of results over the past five years, and I think that they’re not seeing anything immediate which is going to impact that, although they are obviously looking very carefully at what’s going to happen in the sub-prime markets.
JB: I would agree with that. From the Coface point of view, the relationship we have with the reinsurance panel is excellent. They are very supportive, and we value their partnership.
DN: Are you aware of them making sallies into the direct market, which seems to be happening in some areas of credit and political risk.
At Munich Re, they are setting up sort of special political risks unit to do that. Any comments on where that competition might lead to
JC: I think that is a trend we have seen as well.
PJ: I have heard a lot of talk about it but, as an underwriter, I haven’t seen any direct reinsurer participation on transactions yet.
CB: The mood is definitely positive. I can confirm that our class of business is being looked at favourably by reinsurers, whereas I think three or four years ago, it was being looked at very unfavourably. It is quite a turnaround.
KB: Charles, do you think there will be any repercussion with recent arbitration settlements on Argentina
There has been a large arbitration settlement recently, and I hear that other Argentine deals are being arbitrated right now.
CB: We are happily not directly involved in the fallout from the Argentine crisis. But everything that I hear says that those events have been fully discounted into the market, and that the outcome for reinsurers might be better than they once feared.
PJ: We’re all in the business of insurance, and if we don’t pay claims, people won’t buy cover. We’d all prefer it not to end up in arbitration or settlements, but be straight claims at the time. In terms of actual impact on the reinsurance market, I’d agree with Charles that these issues have been outstanding for a while, and largely have already been priced in
KB: As a broker, we talk to clients for whom big claims were paid last year and this – Tajikistan comes to mind and I think that’s great.
GTR: Is it a source of embarrassment for any of you that claims such as those in Argentina take so long to be resolved?
CB: There is a lot of bad PR around claims in our market, but a lot of it is undeserved, and one ongoing trend is an attempt to be more transparent about claim statistics. Without breaching any confidences, we make available the statistics that we have built up in the past 25 years on claims. And as a whole, it tells a very good story, much better than the word on the street about this class of business.
I would add that in any discussion about claims, I always insist upon making a distinction between non-payment, failure to pay class, and the pure PRI covers. The story on the non-payment side is frankly excellent, but somewhat misunderstood. It is more complicated on the pure PRI side, but even that side of the story is not too bad.
RM: The brokers around the table are defending the insurers who have these questionable claims settling reputations. What are the insurers doing, within the parameters of the confidentiality agreements, to combat this
AU: Bear in mind that reputations are hard won and easily lost, so one of the things that Hiscox has done, for example, is to have a list of claims paid on our website. This is to help brokers, to give them ammunition and details that they can show to clients.
PJ: There’s also a generic marketing issue in that people remember bad news, because bad news is interesting, however transparent we are.
CB: To be fair, I do think that the insurers have responded to the pressure that we put them under. There is definitely an acknowledgement that they need too improve. This is partly a problem of image, but there is some real effort going on in certain areas actually to improve the claims performance of the market. Particularly in terms of the timings of payment.
KB: I think it’s been an improved market over the past 10 years. The fact that more and more banks are buying the cover must prove something.AU: It’s also a question of getting the wordings right, and I think there have been huge strides in that area in the last ten years as well. If you can get clarity in the wordings then that helps to avoid misconceptions among the buyers.
GTR: How is Basel II kicking into the PRI and trade credit insurance market?
CB: There is a much better engagement between the banking and insurance markets. If you’re going to use insurance as a credit risk mitigant, it has to work – and that’s what people are focused on.
As we’ve discussed, the wording for financial institutions have improved in leaps and bounds in the last five years or so. And I think that the message is being digested by the banks that the old simplicity that insurance is bad and guarantees good has gone out of the window. Basel II has made the debate more real and serious.
DN: This has been coming for a long time. I think that those banks that have practitioners who have spent a lot of time on claims payouts, were drafting wordings, some three or four years ago, that they felt covered the risks that they wanted to see covered. They have learned that what they have agreed to, and put through their legal and credit committees, is hardly any different to what a Basel II ideal policy should look like, if you were to put the two together. These banks seem to be saying, we are relatively comfortable, we have learned to live with the insurance.
But as Neil said, the main thing is that change is happening. If that is going to be translated into more deals, as I think it will do, then insurance has the huge advantage of not requiring marking to market, which should trigger much more use of the product. The only limit will be the individual counterparty limits on each individual insurer.
PS: I think that we write a product that is hugely improved compared to 5-10 years ago, and the good thing is that most of it is within the insured’s control. It’s a clear product, a fair product, a good product and it works – and we are hoping to see more business. Basel II is a good opportunity for our market.
RM: Our existing banking clients seem to like it. The fact that the uncertainty surrounding Basel II is now dissipating means that more banks are coming to the table. The fog hanging over Basel II for such a long time seems to be lifting.
PJ: In general terms, there is a cohesion now between bank requirements and what insurers are now willing to do on Basel II. The interesting issue going forward is going to be the banks’s regulatory environments themselves and the differences between the various national and regional regulators.
How that battle plays out will be quite crucial to some of our bank insureds, because in extremis we might end up in a situation where our market is happy to do a Basel II wording for a bank regulated in London, but is not happy for a bank regulated somewhere else, re the potential interpretation of Basel II. We still lack clarity on how the regulators are actually going to interpret Basel II in terms of our market, which is fundamentally such a small piece of the pie that the regulators in most markets haven’t really got to that level of detail yet.
AU: I agree, and I don’t think it’s down to insurers to sell certified policies as being compliant. It’s down to the insureds to make that decision. They tell us what their requirements are and we do our best to meet those requirements, but we can’t guarantee that it’s compliant. I’ve not been asked to guarantee compliance.
NR: I think that when you have an underlying payment instrument then it’s much easier for wording to become Basel II-compliant or get close as the payment obligation is separated from performance. But most of the trade around the world is done on open account with unrated and sub-investment grade buyers, where you are heavily reliant on the seller/servicer for the transaction.
I think that from that angle, you might take the view that a bank isn’t in control of all the aspects. I think that it will be quite challenging to bringing the two together.
JB: We’ve seen credit receiveables management business booming because we’ve seen the banks actually requiring a third party to manage that business with certainty. Echoing what Charles said about clarity, I think there’s a greater understanding among banks that insurance isn’t just about a product that has terms and conditions and warranties. There are good insurers versus slightly less well regulated and less disciplined insurers. So depending on where you are in that food chain will determine how people react to you and your product. Also, to expect a level playing field to result from Basel II is a bit like saying there is a level playing field for all ECAs. Which, equally, I think, is a fallacy.
GTR: Which are the ECAs whose business overlaps the most with private market business?
KB: I mentioned some earlier. Sace, EKN, ONDD and increasingly we find, Nexi in Japan. I think frankly they should stick to the SMEs and the very large projects, and get out of the middle ground. They are beginning to irritate me – I think that some of these ECAs are bending rules ridiculously, and I think the taxpayer in Italy or Belgium or wherever is taking on risks that they shouldn’t be. We have had two instances in the last year, where the local ECA allegedly couldn’t do the deal, we provided terms for the deal, and then suddenly, the local ECA could do terms for the deal, even though, let’s be honest, it’s borderline within their remit.
PS: We have a totally contrary view. We work with over 15 different ECAs, reinsuring and co-insuring; we are part of the Berne Union, and we think that ECAs still have a major role to play.
RM: On the investment side we have found that people such as EDC of Canada and Australia’s Efic are keen to work with the private market in a more commercial, creative and productive way than ever seemed possible before. Within the public sector there is a greater understanding of clients’s needs and a growing desire to be flexible.
JC: I’m intrigued by Kit’s view not being supported by the insurers. I think he’s saying that there are a number of examples among ECAs where they are effectively stepping into our products, where there is enough evidence to suggest these are being provided by the private market. What is the rationale for them to step in if it’s not a market of last resort, or supporting an area of development where there is no private market support
DN: I wouldn’t wholly agree. I do think there’s one particular factor that you mentioned which is important, which is market disruption. The approach at ONDD, which I think has shown exemplary behaviour, and has been extremely cautious not to offer terms ahead of the pack, but always to be within the pack, has two vital components.One, it neutralises the argument that they are disrupting the market. Second, they are protecting their capital taxpayer constituency by saying, well, if there is a loss, we were participating in a market loss. So I think they have done a very sensible thing.
As far as ECAs go, I think they bring expertise, I think they bring seriousness, and in our experience, they broaden the market. If they disintermediate, that’s not so good, they need to watch that, but on the whole they seem to be keen to have as many people coming in as they can to speak to them, so they don’t get the mushroom treatment in the corner.
I can only say that I am amazed, and disappointed that ECGD, in a declining market, haven’t taken the lesson that you try to expand your franchise intelligently. They seem to have done the reverse.
KB: Do you honestly think they do bring expertise to the party anymore. In terms of day-to-day run of deal flow (excepting SMEs and large projects) what expertise do they actually bring
I think the cutting edge is in the private market.
DN: On country risk, we have had interesting debates with them. Some of them have structures that vet projects through both policy wording and credit committee – so they are not just passive followers.
CB: The problem talking about ECAs and the private market these days is that you can’t really generalise about a group of ECAs that has ONDD and ECGD in the same cluster, because they are so different.
GTR: Is there any discernible increase in private market competition?
PS: One of the things that I’m always asked about, which is quite related, is how credit default swaps are impacting our business. You can see any number of articles about how their volumes are growing. But it hasn’t really cut across what we do as yet. It has a huge impact on those names which are well rated, but not so much on others in the market. Generally speaking, we see the existing underwriters having more capacity and appetite, rather than lots of new players coming in.
AU: I believe credit swaps are priced to the bond market, which is very different to a trade finance and political risk policy anyway.
JB: It also depends which markets you’re talking about: If its whole turnover credit insurance, then Euler Hermes and Atradius are continuing to effectively have a price war, whereas if you’re talking about PRI, there are niche players who come and go.
JC: One notable trend is the growth in underwriting capacity for structured trade credit/emerging market medium-term trade credit risk, both from the banks and the traders and some corporates. That area has definitely expanded significantly over the last three-four years, with certain companies that are leading the market represented here.
We are seeing more and more markets moving into that sector, either through their existing PRI underwriting operation or existing trade credit operation. Some players are stepping back and not entering that market, but there has definitely been growth.
JB: The other thing to bear in mind is new purchasers of the coverage. Certainly in 2006, over 60% of our new business sales were to customers who had not bought the cover before. So if as brokers and insurers we want to expand the market, there is plenty of appetite out there, its just a question of ensuring that we all play to our strengths.
DN: Although we’re talking about new entrants, it’s a shame that someone like XL, for example, that had all the capital structure and resources, withdrew from the market. It’s worth pausing and taking our hats off to them, as they brought balance sheet strength and underwriting imagination.
AU: We are seeing existing players offering bigger lines and longer tenors, so there is increased competition within the market, but not necessarily from new players.
JC: Another point is thatI think the barriers to entering the market are becoming much higher. The underwriting community has become a much more sophisticated, more qualified and professional group of practitioners, whose expertise makes it much better able to meet the needs of the clients in this area.
I’ll give you an example – some of the insurers are splitting out commercial underwriting from risk underwriting.
GTR: War and terrorism risk has come into much harder focus since 9/11. How has the market evolved?
CB: Certainly the growth of the standalone terrorism insurance market at Lloyds and the surrounding market has been a phenomenon. The convergence that is going on between the terrorism insurance market and PRI market has put us in a position where we have a very wide group of PRI policies for people with assets and investments in emerging markets.
Starting with the terrorism policy that just deals with the lower end of the spectrum of political violence, to a full PRI policy, I think the supply side is now so full that we are at the point where people who have not used the PRI market need to sit down and evaluate what they really want to use it for.
I don’t think a lot of corporations have examined what the capabilities now are. They ought to look again and get the use of the PRI market clear in their minds.
RM: Since 9/11 we’ve seen a much greater willingness in the market for product development in line with clients’s demands and expectations. This includes a willingness to look at areas that were simply taboo before, such as nuclear biological chemical radiation risk, cyber-terrorism and terrorism liability, which in the static, pre-9/11 terrorism market simply wouldn’t have crossed people’s minds.
As Charles mentioned, other responses include the wider availability of political violence, as opposed to straightforward sabotage and terrorism. The Lebanese-Israeli conflict highlighted the inadequacies in straightforward boiler-plate terrorism cover, which just wasn’t addressing the issues of the day. I think that brokers played a key role in helping create awareness, and forcing the market to address these needs.
GTR: Investment insurers went on the back foot in 2006 as ‘resource nationalism’s emerged in Latin America and parts of Africa. Has demand quietened down?
RM: It’s still there.
KB: A lot of enquiries we have had have been shutting the stable door after the horse has bolted, particularly in Latin America for obvious reasons. So, in one sense you can say that Chavez and Morales are great potential salesmen for the PRI industry. Whether they have closed that many deals for us is not so tangible.
RM: Things have come full circle, with Alan Garcia coming back to power in Peru. He was at the forefront of the ‘straight snatches’s of 20 plus years ago.
DN: The situation in Argentina was different. It was a kind of by-product of an economic collapse and political collapse and some measures that affected the currency. So, in defence of the market, it wasn’t as nice and clear cut as Chavez and Morales made it. Those events have been a real déjí vu of the old political risk events, which is great for our product.
PS: Russia is an interesting market as well, watching what is happening there in the resources sectors. It hasn’t gone away as an issue in 2007. There has been a huge growth of underwriting natural resource-based risks and assets in Russia. One thing that one does learn looking at the statistics and history of the market is that these events are often unpredictable. It’s always difficult to gaze into the crystal ball, but certainly from what we see – which is a huge amount of Russian risk placed in the market – I would think that most insurers have quite large aggregates and levels of exposure in Russia. If that market were to turn sour in the commodity resource sector, the impact could be quite large on both the private insurance and banking markets.
JC: A common theme at the moment is that the issues around resource nationalism, looking at the interpretation of insurance policy wordings, have raised the issue of financial investment treaties, where the components of bilateral investment treaties (BIT) fit alongside private market insurance. I think there is some debate to be had around that subject in the future.
RM: A point was made at a recent political risk conference that the trouble with BITs is that they look great on paper, but the guys that are causing ructions in Latin America are exactly the ones who are ripping up the BITs. If they are going to do that then it’s back to square one.
GTR: What real value can an SME obtain from the trade and PRI markets?
JB: When you talk about SMEs it’s important to define the size of company you are taking about. The term is bandied around so readily, but historically, in the UK, from a banking perspective, an SME is a company that turns over £1mn or less. From a Coface perspective in the UK, we’re really looking at SME business as about £4mn turnover up to about £10mn.
In terms of the offerings that are out there, that’s much more about credit receivables management than a more PRI structure or policy. From our perspective, what an SME can expect from a partnership with a credit receivables manager is actually an outsourcing of their administrative function, a risk control function that is either in partnership or outsourced, and indeed the financing of those receivables as well. If the company is exporting, an insurer with a broad spread of representation in 100 countries is an ideal partner.
RM: Andrew made the very valid point earlier that a political risk insurer considers themselves in partnership with the insured first and the risk second. Whether it’s an SME or otherwise, that rule still applies. If the company is too big, they always have the option of self-insurance, that perhaps SMEs don’t.
With the credit crunch on its way, and capital being less readily available – arguably the real value to SMEs of a political risk insurance policy is as a tool to leverage finance.
AU: Actually I think SME in some ways may be a better insured because they have smaller balance sheets. Any negative consequences from not getting paid for something, or losing an investment overseas, will have a far greater effect on the balance sheet perhaps than a larger company .
GTR: How has the project finance market changed over the past year or two?
JC: I think this goes back to how the use of PRI to relieve country limits will be interpreted under Basel II. One of the trends is towards comprehensive coverage, but there is a lot of debate going on around pure political risk only which is the cover that tends to apply to project financing.
JB: We’re seeing requests for cover on quite a lot of commercial loans tied to project finance, advance payment financings and the like de-linked from the ECA portion. These can be five-to-seven years, so you don’t have to go to the full 10-15 year horizons to be involved in that market. We are seeing quite a lot of that and are happy to write it.
PS: We’re seeing solid demand for our project finance covers. Again, maybe that’s a result of working with ECAs, and being able to write out to the market’s typical 15-year tenors.
The problem with project finance deals is that obviously they take a long time to come to market, and be put to bed, and so are quite hard work, but steady demand is still there. The sectors are often those where commodity prices have made certain projects viable, such as mining and oil and gas.
DN: I think it is sector-skewed, and it’s difficult to do some project finance structures where there is no foreign exchange revenue flow. Telecoms and power and water projects with local cashflows can be more difficult – and these will provide the really important demands in future.
KB: Power deals are coming back and we are seeing a lot more bio-diesel projects.
PS: Clearly, with a much greater focus on concessions and agreements issued by host governments, we are seeing an increasing move, and have done for a while, towards arbitration award default cover, to protect those agreements. The cover is becoming more specific to the risks faced by the project, which has been made possible by a lot more due diligence by insurers and the brokers, but primarily on the insurer side.
I would say that insurers are now beginning to move to a point where they are reviewing a project financing holistically, looking at all the underlying agreements, credit issues, the upstream and the downstream, and all of the components of the risk in a lot more detail than they were previously. As a result, they are able to offer more bespoke coverages around the real risk of the project.
RM: In an effort to wrap it up on a high note, let’s hear it for the credit crunch, as its adverse impact on the availability of abundant equity finance may result in more opportunities coming into the PRI market.
