The issues of non-cancellable policies, providing consistent cover and finding new business were the central debating points at this year’s GTR trade credit insurance roundtable.
- Kevin Godier, freelance trade finance journalist (chair)
- Mike Holley, chief executive, Equinox Global
- Stuart James, head of trade credit, ACE Global Markets
- Rupert Murray, executive director, political, project & credit risks, Arthur J Gallagher
- Ewa Rose, managing director, trade credit division, Markel
- Neil Ross, senior vice-president, trade credit, Chartis
- Phil Simmons, commercial director, Aon Trade Credit
- Trevor Williams, portfolio manager, trade credit Europe, QBE
Equinox Global kindly hosted the roundtable at their London offices.
Godier: Your sector was heavily criticised for its withdrawal of credit lines and lack of transparency during the height of the 2008-09 financial crisis. What positives emerged from that?
Williams: Whether it was for good or for bad, more people seem to know of the product than they did two or three years ago. There were lots of negatives, but the positive is that the product has a higher profile.
Simmons: The need for improved communication was very apparent and has now been addressed. Those of us sitting around this table didn’t have the issues that perhaps the three major whole turnover underwriters had at the time. They had a very severe problem that they addressed as they saw fit, and one area that emerged from that process was definitely the question of communication.
The need for up-to-date management information from insureds has also been recognised through the publicity. Companies are building up strong databases of information that can be used to assess risk now. Risk companies who refuse to cooperate will be increasingly viewed in a negative fashion.
Holley: Buyers are more willing to talk to us. I have had a few calls from quite large companies who say ‘I need to talk to the credit insurance industry, who should I talk to?’ That type of consciousness is a plus.
Murray: HMV is a good example.
Ross: The message that insurers needed to get a better insight into company trading positions was effectively communicated into the marketplace. Historically, companies were very reluctant to share information on anything except that which was publicly available, but now they are much more prepared to give us their management accounts. Another really encouraging factor was that, through the crisis, we received some fantastic feedback from our clients about the positive support we provided, which let them retain cover on key buyers and sectors. We were also praised on our ability to pay claims promptly. We believe our actions kept a lot of those companies going.
Rose: What also happened was that as other industries increased the need for risk transfer and capital allocation issues arose, that played into our hands enormously in terms of demand. To be honest, we see the main positive coming out as being more demand for our product.
Murray: Yes, there was the recognition that aggregations of exposure on what was considered good quality risk by major corporations suddenly became an issue in terms of due diligence and in terms of looking for ways to get rid of that risk.
Rose: And needing capital relief through the insurance, because banks’ balance sheets got reduced, or there were aggregations as a result of certain bank mergers. That will all help us in the long term.
Simmons: Generally speaking, the way that the markets’ claims departments responded to the increased volume was very positive. They didn’t run for the hills and hide behind the small print.
Rose: That rubs off on us very positively. The trade credit market did have losses, but not anywhere near the size of the losses that hit structured trade credit portfolios. Many clients use both these markets, so the fact that insurers did pay out huge amounts of money is undoubtedly a positive.
James: One of the positives is clearly that this is a broader market, which is a good thing, from the point of view of trying to retain business in the market. There has been a shift, particularly for the larger corporates and multinational customers, who maybe don’t need the crutch of the whole turnover products. But rather than coming out of the market fully, they have looked at alternative solutions.
Ross: To some extent many companies were forced, for the first time, to actually start doing credit analysis themselves after they had cover withdrawn. In many cases they wanted to continue trading, so they had to get more comfortable and professional with managing their credit exposures and credit limit setting internally. This imposed discipline has meant an excess of loss approach is now much more within their grasp.
Murray: The positive, perhaps, was that a temporary new stance that you have to price risk correctly lasted about six months. Unfortunately it was only very temporary.
Holley: I’d like to mention syndication as well. We have seen cases where an insured has been a bit shocked by their treatment by a single insurer, and has said: ‘OK, we want to continue with the same insurer, but we want to bring another one alongside them.’ The market has responded to that by being willing to syndicate now on multi-buyer policies, as well as on single risk policies.
Godier: How much of a novelty is that in the market?
Rose: It was a novelty when Euler Hermes syndicated for the first time, when we were at Ace. Bringing the whole turnover players to the table to recognise that syndication is something useful was a win. But I would say that capacity is now ample, and the whole turnover market no longer needs syndicate partners.
Ross: There is more reinsurance capacity, and also new direct underwriters entering the market. However I don’t think that the overall market business has grown. More players are competing for the same business, which will put downward pressure on premium rates. It’s up to us as an industry to try and attract new players and grow the marketplace.
Rose: As an excess of loss player, we have a relatively small underwriting team. One thing we don’t have, and never will, is a sales team, so what we do very much rely on is brokers to sell and push the product. Some brokers will see that 15% of a whole turnover income is more than 15% of an excess of loss income and so there just isn’t that push towards new solutions. The opportunity is undoubtedly there, but we need brokers to direct the market, educate clients and to lead this process. I don’t think the excess of loss market is growing as much as it could do.
James: Where Euler Hermes deserves credit for growing the market is in the SME sector, which is not necessarily attractive from where we sit. They do create a lot of new business through that but there’s not a huge amount of growth available from the large corporates.
Williams: It’s just dog eat dog at the moment, where people poach what they can from the competition. There is not a lot of ‘new-new’ business coming on. And when it does, it’s a feeding frenzy. We’re back below where we were three years
ago on rates.
James: I certainly think our rates are considerably higher than other established trade credit markets, especially the US. But we should be growing the market every year. I’ve been in the industry 16 years, but nobody has really cracked it yet, not with traditional methods.
Simmons: I agree. The traditional stages of the cycle are playing out again now. Claims increase, so the underwriters look to address that issue in isolation. When that issue is addressed, they worry about their revenue line. That’s where we are now. One of the market leaders’ global revenue fell by 8% last year, and their loss ratio fell by 40%. So they sorted that one out, and then turned their attention to the revenue. Whatever blame games are going on, existing business will be churned all the time if the pipelines are not full of ‘new-new’ business.
Rose: We do see niche Lloyd’s brokers producing very good quality enquiries. It is ‘new-new’ business, and it is coming from that back part of the market, be it from continental Europe, which is traditionally a whole turnover market, be it from the banking sector, or from various innovative products. Although this is encouraging, the business is at the small-scale end.
Holley: What we need to crack in order to obtain new business is a certainty of cover. If you were to speak to all the companies that could buy credit insurance and ask why they don’t buy it, it wouldn’t be because they don’t know that credit insurance exists.
They know about it, have considered buying it, and have decided not to, and it’s usually because they are concerned about lack of certainty of cover, and the fact that it can be withdrawn. The message that we all need to get across is that there is an alternative way.
Murray: Yes, but it’s far easier for a broker to sell something if the client has it already. That is why brokers will continue to compete against each other for the same business, as opposed to going out and finding something new. It is easier to get 15% of £100,000 from somebody who is already there than 20% of £100,000 from somebody who hasn’t got it at the moment. Then if you prove yourself to be a better servicer than your broking competition, you’ll win the business, and you’ll knock 10% off the rate, so we all suffer. The underwriting market needs to find a way of incentivising brokers to get people thinking differently.
James: We are hearing that more of the bigger business is fee-based.
Murray: There is always talk of fees, and always has been. What we are seeing is that there are some major global organisations that are looking at ways of getting better value out of their insurance, if they have it, or looking at ways of insuring their huge exposures to major groups across the world. If we can aim to get into that sort of area then the excess of loss market will benefit. And there is the opportunity to charge proper prices because a major corporation will pay a proper price for the job if it gets the support it believes it deserves.
Williams: We’re entering the excess of loss, non-cancellable market, but you will also see the traditional insurers – Atradius, Coface and Euler – coming straight into this market, and slashing the rates. The market is not what it was in terms of ‘there’s your playground and there’s our playground’. The market is the playground.
Rose: What happened during the time of those soft rates last time was that there were few excess of loss players in the market. Things have become very different now.
James: Nonetheless, I still think a sophisticated big corporate or global customer will see that excess of loss is not the core offering from Atradius or Euler Hermes or Coface. I think they have a real positioning issue, or a marketing issue, as to how they could disconnect from what they are really good at, to suddenly offering something very specialised. Euler has tried to do that in special parts of their business, and we will see more of that. Atradius have been doing special products for a while, but it isn’t going to be easy. On the other hand, the model at Chartis has worked very well over the past few years, leveraging technology and looking at the business in a different way.
Ross: We need to be able to deliver modern-day solutions. In the past, excess of loss didn’t necessarily need to have hundreds of underwriters or too many on-line systems as underwriter focus was on policyholder.
Today, many multinational companies need to have a global solution which meets both group and local needs and thus different levels of access to the underwriters. With regard to the lack of ‘new-new’ business in the marketplace, we should look at it from the brokers’ perspective, particularly looking at the lead time for closing a new case.
Two years is unfortunately not an unrealistic lead timescale for ‘new-new’ business, and the brokers’ success rate on closing such deals is probably not that high in this environment. So as an industry we have to consider very carefully what we can do to promote the products more effectively, providing much warmer leads for the brokers to harvest.
Simmons: You also have to look at the expenditure entailed. It’s a big chunk for most companies that are not at the top end. If they have a budget set for the year, and we are asking them to spend £100,000-£150,000 or more, there is an internal process that they will have to go through to get that agreed. There is a case at the moment with our people that absolutely illustrates what you are saying. We have been putting it out that this is going to close next month for the last three months, and we have actually gone backwards, rather than forward. I don’t know the answer to it, but I don’t think people can snap their fingers and spend £250,000 that easily these days.
Godier: Is the credit cycle still in a fragile space?
Williams: Insolvencies haven’t improved that much. The insolvency rates are still high but the industry itself has got better at digging out lots more management accounts and information, so the incidence of loss for the industry has fallen, at a time when the insolvency levels are still relatively high. But in terms of how the cycle will look in six months time, you will probably get a different answer from everyone here.
Ross: The biggest issue at the moment is probably interest rates. There is no doubt that low interest rates have kept insolvency rates way below the level that everyone predicted. When we went into the crisis in 2008, we were expecting a tsunami of claims, but that didn’t really last.
Firstly, there was a lot of money thrown into the economy by all the governments, and, more importantly, interest rates were low. However, many of the fundamental issues that caused the crisis still haven’t really been solved – the symptoms have just been tackled by being given a bit of medicine. A big concern now is that inflation seems to have a fairly strong foothold. We may see a situation where western economies combat this by pushing up interest rates which may devastate companies that are only just surviving.
Holley: If you look at the dip in GDP in the latest recession, and then the way that bankruptcies increased in the UK, and then compare that with previous recessions, the increase was much less than you would have expected.
Ross: There was pressure placed by the government on many banks to support companies and not to seize assets. As the banks’ balance sheets regain strength, the banks’ appetite will be tested as there is a mountain of corporate debt which must be refinanced over the next few years.
James: There is no correlation between the risk out there and the pricing, which is geared to renewing business.
Godier: Is the spectre of cancelled limits hanging over the market again, as a way of dealing with the next wave of claims?
Simmons: It’s the only way that they can control the loss ratio quickly.
James: There is definitely a collision course, particularly if Europe starts to overheat.
Holley: We also have a big risk on commodity prices. These have been very buoyant in the last period. A lot of finance is driven by commodities as an underlying asset. A sharp correction in commodity prices is another major uncertainty, with implications for the whole global economy.
Godier: What is the current feedback on your industry from reinsurers?
James: I don’t necessarily think its credit issues, but more the catastrophe issue for them. So while there may be considerable capacity for this year, how they support the industry and how much it costs after that will depend on how it looks in a year or two.
Williams: If they can see rate increases across the other general lines where there have been catastrophes, they will want to put their money there. There is a real concern that they could only be prepared to put a certain amount of capital towards this class and it is going to cost more.
Holley: Credit has really benefitted from the softness of the insurance market generally at the moment. We were at the high point of our cycle when most lines were very soft, and that has brought a lot of new reinsurance capacity aboard.
Godier: Presumably the fact that loss ratios have been relatively contained has acted in your favour?
Holley: There is no doubt that the way in which the industry came through this incredible crisis, with its loss ratios relatively intact, has given reinsurers a lot of confidence. I wouldn’t expect there to be any problem with it all disappearing.
Murray: It won’t disappear, but it will be more expensive next year. If prices go down, and we do then have a major loss in one or two years’ time, then surely the reinsurers will lose interest?
Williams: In my experience, the reinsurers have shown a very consistent approach over the years. Whereas I guess some of the primaries take more in-house when times are good, and go back when times are bad.
Godier: To what extent has the non-cancellable, excess of loss model been embraced by the underwriting market and its clients?
Rose: Once you get a buyer with the client to understand the concept, they love it. But getting the buyer on board can take a long time. It’s an education process, and it could be something that you need to revisit three years running before they make the switch.
James: The customer feedback for those purchasing excess of loss is generally that they have managed their business through the crisis as the product offers consistency and certainty. Converting them from what they’ve got (whole turnover) to what we do is a whole different ballgame. That could take some time, it often needs a little bit of creativity, some third-party intervention, and it certainly needs technology. The good thing about where we all sit as a market is that we are probably quicker to embrace those changes and the different structures. Once we get new clients in I don’t see a migration back to whole turnover.
Simmons: Generally speaking there is a conservatism in buying a financial product. A number of times we hear the cliché of ‘better the devil you know’, so you have got to keep banging on the door to get them to change, and continually prove the benefits of doing so. I know of one client who had a very large whole turnover programme bought on that basis for many, many years, and they said 12 months ago that they would not renew with that underwriter again.
But of course when the renewal comes round, the whole turnover guys have all the limits their client need again and have gone back in on these risks. They have cut the price, they will go back and retrospectively adjust the premium from last year as well, and I’ll be very surprised if the client takes the big jump to an excess of loss policy.
Holley: But they will get their fingers burned again.
Ross: From an excess of loss underwriters’ viewpoint, it was disappointing how short peoples’ memories were. We had a lot of companies who had said that moving away from whole turnover was high on their agenda. Nine months later and this had changed to: ‘Well, maybe not this year.’ Insurance is a promise. It’s very easy for companies to compare alternatives when they are buying equipment, because you can see and compare all the benefits very visibly. It’s down to excess of loss underwriters to get our message across much more effectively.
Simmons: We find that when people do make the switch, they recognise it’s not just about credit insurance, it’s about their internal systems, procedures and responses as well.
Holley: And that’s why we have to be flexible in bringing them in. I think all of us are working with them to make the transition.
Williams: There appears to be no better time to buy the product than now. The rates are being cut ridiculously, and the cover being offered is back to beyond where it was three years ago.
Murray: If you didn’t have it before, and you didn’t suffer losses, then why would you buy it now? You got through the recession. None of your customers went bust, you carried on trading, your trade levels dropped, but they have come back up again.
Simmons: But there are plenty of reasons why things could get worse.
Rose: I am amazed at how few companies know that there are alternatives to the whole turnover solution. I don’t think people are educated in that alternative – which is where the broking companies have a role. People think that they have to declare all their turnover, they think they are going to be charged on turnover, it’s going to cost them X, they can’t pick and choose what portfolio they may want to insure, or the fact that if they have had good times through the recession they can take an excess. Every paper that you read says there will be problems for the UK, so risk managers must be aware of the risks out there. And yet we are not selling as much as we thought we should be.
Murray: This is a broker’s job. We understand the need to do that, and I hope that the rest of the market does.
Ross: What we are seeing today is that the appetite of underwriters has increased which has led to some decline in underwriting discipline and submissions standards. Broker quality is very diverse, but we have seen too many instances where the level of information supplied is not as complete as we would like to see. It then becomes much more difficult to assess the risk and suitable structures.
Godier: New players have broken into the trade credit insurance market over the past year or so. Will the market’s reversion to rate cuts prevent more emerging?
Holley: If you take a very short-term view, we have a period of low prices at the moment. But I think the longer-term picture is that the market is displaying a lot of volatility, and I would expect to see that once the economy has another shock, which it probably will, that this temporary period of very low pricing and very high limits will end. That’s why, in my view, the market needs fresh blood. If there is another shock to the economy, and if we start having limit cancellations again, that will further reinforce the need of the market to change away from this roller-coaster of volatility. Three companies have come in so far. Markel, Latin American Underwriters and Equinox. On the credit reinsurance side, there has been a larger number of new entrants, but it wouldn’t surprise me to see another wave.
Rose: In the structured trade credit market, there is a big growth in capacity, and there is a big recruitment drive. New blood and new players are needed to grow the market and prevent staleness.
Holley: The structured credit or single situation credit market seven or eight years ago was tiny. Today, a broker in London probably has 25 underwriters that he can go to. That mushrooming of choice has not forced down prices and made the pieces of the pie smaller – rather the market has expanded beautifully, with enough business for everybody. In this room we have a London market for multi-buyer credit insurance that would not have been possible in the past. The fact that it is lean and flexible should attract more brokers, and more syndication, which will help bring the longer-term growth.
Williams: New entities will come in as long as there is reinsurance capacity. There is plenty at the moment, but in 12-24 months time, reinsurers could obtain rate increases in some of the other markets. Also the primary rates are low, which is not exactly encouraging.
Ross: This goes back to the point that we have to grow our market and to be able to differentiate our product offering. I haven’t seen an explosion of new products and innovation coming to the market. So I’m looking for the new players to attract some new clients to the industry.
Godier: Where can new business come from?
Holley: Looking at the US market today, compared to when I first became involved some 15 years ago, it is far healthier. It employs far more people, there are a lot more suppliers, and a lot more penetration, with a very large percentage buying non-cancellable limits and excess of loss. The UK, Switzerland and the Nordic markets are also open to the concept, whereas if you looked at France and Germany, the obstacles to getting people to sign up are very large.
Murray: The owners of the big three providers are Franco-German, and the philosophy of the French and German trade credit insurance market clients has been to do what the insurer says. It may well be that the clients in those countries, with their tradition of having their credit limits managed, may not be the niche for your sector, where the clients enjoy more self-determination.
Ross: New opportunities for insurers can also come from regulatory activity. Bank capital is now more constrained – via Basel II and III – in terms of their ability to assume credit risk. So, as an industry, there is a huge opportunity to work much closer with banks. To some extent, this has always been our Holy Grail. At the moment, our product is a sort of ‘nice to have’ but it hasn’t really driven bank decisions. Going forward there is an opportunity. Insurance companies are regulated and capitalised in a different way to the banks. Banks are good at providing liquidity, whereas we are good at taking risk.
Godier: What are the obstacles in that respect?
Ross: One of the biggest is overcoming some of the preconceived ideas about insurance held by banks. Many banks historically have had poor experiences. However, banks are having to change how they manage risk themselves and are now looking for new forms of protection.
Simmons: A buying decision from a bank is a lengthier process than from a corporate.
Murray: I don’t imagine a lot of brokers have banks as their primary target. But you would think that, with the demands of capitalisation, the banks would be using us far, far more than they do. The best access point for banks is through the corporate, where the corporate sells the idea to the bank, saying, ‘you can lend me more on the back of this policy’.
Godier: What other blockages are there?
Simmons: Our biggest concern goes back to the point about another wave of losses, leading to the next wave of the cycle, where the clients have another bad experience of their whole turnover products. There is now something that can answer these problems. But if we don’t get that message across, or prepare to do so, we will carry on with this cycle of boom and bust.
Ross: We haven’t talked about Solvency 2. I don’t think it’s going to have an immediate impact because most of the credit insurers are well down the track of developing their own models. However in the longer term, it may start to have an impact, by forcing underwriters to have a better methodology of how they price future business, and how they manage their internal capital and returns. The credit insurance world is going through a period of increased volatility. The industry results generally follow the economic cycle, and we will probably see a little bit more volatility in the world ahead. It’s going to be absolutely critical for insurers to have a well-structured and diverse capital base.
Godier: Will that sweep away the pricing competition that is so prevalent again?
Ross: It is still really unclear whether the level of exposures that some of the underwriters are carrying on their books can be maintained. Their recent performances suggest that they should be able to cope, but a deeper analysis of that exposure might bring a bit more pressure against capital base supporting this.
Holley: It’s interesting to look at this question of how much capacity is available in the credit insurance market. On the one hand you might say that with the reinsurers coming in, and with the limits that people are putting out there now, there is too much capacity. I would actually argue that in terms of stable, committed capacity, there is a chronic shortage. Every time you look at the financials of one of your buyers, you want to see a balance of short-term and long-term debt availability. If all the capacity you are relying on is short term, this is extremely volatile, and is the reason why Northern Rock went under. I would argue that still, in our marketplace today, nearly all of the credit insurance capacity that our industry is putting out there is extremely short term and can disappear within 60 days.
Williams: We have been seeing some blurring of the whole of turnover and the excess of loss market from the whole turnover insurers, where they say: ‘We’ll hold that for 90 days, and give you three months non-cancellable cover.’ It is a good trend, but it will only last for a certain period of time before the cycle forces a change.
Ross: I am very intrigued that the whole turnover market is now proposing to provide non-cancellable limits. However it’s not just a question of changing policy wording, but also the underwriting philosophy of the underwriter.
For the last 20 years, the whole turnover players have argued that there is no such thing as a non-cancellable limit, so to come out with this product now is an admission that they were wrong. It will be interesting to see how they support that product when the next downturn occurs.
Murray: I have always felt that one of the reasons why the excess of loss market did so well in the recession was not just the non-cancellable element of the policies, but the fact that the philosophy of the underwriters, even at the renewals, was not to head for the exits but to maintain cover, on the understanding that the client knows what they are doing.
Ross: For the excess of loss underwriters, the primary focus has always been the client. We build structure and cover around that, whereas whole turnover players tend to be more risk-focused in their approach. The excess of loss market also aims to have a long-term and consistent underwriting approach through all the aspects of the economic cycle.
Holley: Every new buyer that our customer deals with is a huge investment of time. It might superficially sound attractive when a credit insurer promises a large limit on a risky buyer, and the customer invests his energy in that relationship, but actually, if the cover is taken away very quickly, he has wasted a big investment in building that relationship with his client. It might have been more efficient and helpful for him in the longer term to have been told the truth.
Murray: The whole turnover underwriters will argue now that they know the customer far better than two to three years ago. That because they have the up-to-date information that they lacked 24 months ago, they can write that support – and so if there is another recession, they won’t withdraw the cover. GTR