Asia’s relative economic resilience and its status as an untapped credit and political risk insurance region are underpinning hopes among brokers and insurers that their businesses will continue to increase, writes Kevin Godier.


Everyone is very hopeful that this is a growing market – and there is some evidence for this,” says Richard Abizaid, senior vice-president and regional manager, Asia Pacific credit & political risk at Zurich Insurance Company’s Singapore branch. “Encouragingly, we are starting to see some Singaporean and Malay banks – and occasionally a Chinese bank or two – looking to political risk or credit insurance as a risk mitigation tool. However the Asian corporates are a tougher nut to crack.”

Abizaid is particularly encouraged by the Singapore government’s launch of its International Enterprise (IE) programme in late 2012. The scheme is designed to promote loan insurance and political risk insurance (PRI). “There is no export credit agency here, so the government is collaborating with the private market, and will pay up to 50% of the PRI premium for an SME to cover its investments. The product needs to be explained, which takes time, but we have had our first enquiry,” he says.

The IE scheme is described as brilliant by Stuart Ashworth, executive director, head of financial solutions, Asia Pacific at Willis in Singapore. “While there may not be much business bound yet it adds to the education process about our product, which allows people to lay off risk and concentrations.” Ashworth notes that among existing buyers’ Asian operations the use of insurance is increasing. “More of the banks are taking a wider view so that they realise the capital benefits,” he says, referencing the role of insurance as a credit risk mitigant for regulatory capital benefit.

“The aim has always been to develop Asian banks, traders and manufacturers and this has been a long-term strategy of Ace Global Markets,” adds Julian Hudson, Ace’s regional manager, political risks and credit, Asia Pacific. “Over the past 12 to 18 months a handful of brokers have spent considerable time developing this strategy and we have assisted in this and it is finally paying dividends for insurers, brokers and the clients. Over the past few months we have issued policies to clients with no previous experience of the products.”

Some of the market drivers are explained by Matthew Strong, JLT’s managing director, credit, political and security risks, Asia, who says: “There is increasingly interest and levels of traction with Asian financial institutions and, to a lesser extent, corporates. It has to be remembered that the necessity and drivers for some of these entities to utilise the credit and PRI market will be different from, say, a European bank or corporate, and this will shape to what extent the market is successful in developing this area. The good news for the market is that as the regional and local banks’ portfolios continue to grow at a considerable pace, they are looking for alternative means of risk distribution.”

The prevailing uncertainty in the risk climate will also help drive product uptake, stresses Mark Houghton, XL Group’s Singapore-based senior underwriter, political risk, pointing out that the company’s clients across Asia are becoming increasingly aware of the credit and political risks that affect daily operations as well as strategic investment decisions. “Recent events in North Korea, as well as the sovereign dispute between Japan and China over the Senkaku/ Diaoyu islands, prove just how quickly such volatile situations can evolve,” he says.

JLT’s Strong warns that with the considerable influx of insurers into Asia over the past few years the market is likely to become increasingly competitive in the shorter term as the growth curve slows. “However, in the medium to longer term there will still be considerable growth in demand for the TCI (trade credit insurance) and PRI products within Asia as new clients are introduced to the market,” he predicts.

Asia’s far horizon is also emphasised by Davide Guidicelli, head of the credit underwriting office and director at Swiss Re Corporate Solutions.

“PricewaterhouseCoopers economists have projected that China will overtake the US as the dominating force in global trade by 2030. Out of the top 25 bilateral sea and air freight routes, 17 are expected to be connected to China,” he says.

Another way to view the insurance business opportunity, he highlights, is to note that between 80% and 90% of world trade relies on bank finance in the form of trade credit and short-term guarantees. “Asia uses more trade financing instruments than anywhere else – 30% of global exports and more than 80% of trade letters of credit are issued in Asia, according to figures from Standard Chartered,” he says.

Demand triggers

So which project and commodities markets are currently generating the most demand for TCI and PRI underwriters based in Asia? “We are seeing requests in particular for Russia and the CIS, China, Vietnam and, most recently, Mongolia,” says Miles Johnstone, Aon’s Asia director of political risk. Hugh Burke, Aon’s Asia director of credit risk, flags up policies involving the power sectors in Vietnam, Thailand and Indonesia.

He says: “Banks are funding projects and commercial entities in many of the emerging markets across Asia. To enable them to offer this facility they are utilising the TCI and PRI markets as a risk transfer tool and to access additional capacity over and above their internal limits.”

On the PRI side, Johnstone believes that the market drivers go beyond banks’ preparations for the implementation of Basel III. They also encompass a greater awareness of the risks stemming from recent events in Asia such as the Maldives’ government’s cancellation of Indian infrastructure company GMR’s airport concession in November 2012, new restrictions on unprocessed mineral exports imposed by the Indonesian government in May 2012, and attempts by the government of Mongolia to renegotiate Rio Tinto’s investment agreement for the giant Olu Tolgoi copper and gold mine.

“Mongolia is probably the hotspot right now but demand is still high in the more traditional markets of Indonesia, Vietnam, China and India,” says Hudson at Ace. Meanwhile growth across the board in Asia, with Indonesia, China and India still leading the way from a risk demand perspective, is observed by JLT’s Strong. “We are also seeing continuing interest in Mongolia as well as a number of Vietnamese deals being placed into the market. Another trend is the growth of non-Asian business entering the market with an increasing number of African, South American and Middle Eastern deals being produced from the Asian clients,” he says.

Aside from a particular focus on China, Vietnam, Indonesia, India and Mongolia, “Myanmar is also a key emerging market for which demand will increase as its government and political system evolves and as our clients begin to access frontier opportunities in the country”, says Houghton at XL Group.

Swiss Re Corporate Solutions’ Guidicelli points to “Bangladesh, Pakistan and India with their pressing needs for power generation; besides Mongolia, also Papua New Guinea has big mining projects in the pipeline which will likely require PRI”.

Zurich’s Abizaid underlines that a lot of trade finance and pre-export finance commodity deals go to China, India, Indonesia, Bangladesh and Sri Lanka, while mining sector PRI is most often required in Australia and Indonesia.

One major change in market patterns, says Ashworth at Willis, is that there is less demand for government non-payment, as sales to state-owned enterprises decrease and ministry of finance guarantees are no longer the key channels required for accessing finance. “There is far more private sector liquidity in the market place,” he says, adding that “an enormous amount is going on in China, and with a great deal of business being booked through Hong Kong it has made accessing this growth market far easier”. This has resulted in a growing interest in foreign direct investment and the subsequent use of insurance, he notes.

Ashworth adds: “It just needs one or two deals for people to realise that it can be done. However as a word of caution, at present the problem with China – and India – is that if clients or insurers engage in unsuitable transactions or select the wrong partners they can lose everything.”

Market gaps

Are particular gaps being targeted by brokers and underwriters to increase their PRI and TCI market volumes? Abizaid observes that “the underserved markets are Asian corporates and banks and trading companies”, pointing to new broking market entrants such as BPL Global and Texel as offering strong expertise in their interface with trading companies looking to bring in new deals. He says: “The market in Singapore is definitely growing, but as a result of business provided by the traditional insureds that we see all over the world, mainly banks. A lot of European banks traditionally buy out of London, but are now placing Asian business booked here in Singapore.”

One of the obvious gaps would be increasing the number of Asian clients. However according to Ashworth, this is not easy as “Singaporean banks are well capitalised and are really not concerned about the regulatory issues of lending into Southeast Asia. And while Asian corporates are increasingly risk-averse, they often take comfort in regional relationships and bilateral investment treaties in the markets where they invest,” he says.

Hudson notes that corporates seeking PRI for their overseas investments have been helped by the Singapore government’s PRI scheme but says “this remains a largely untapped market save for the very large or complex projects.”

Guidicelli at Swiss Re comes at this from another angle. “There are several ways market players address gaps. In areas where capacity is constrained, the focus shifts towards deal structure to address the critical issues. For example, certain frontier markets experience financing constraints, but yet have been able to access and increase financing capacity by mitigating risks through the deal structure,” he says. Another example he cites is where underwriters support local currency deals to address capacity constraints in local currency denominated financing and dollar liquidity for some frontier markets.
Houghton believes that more business could be transacted if potential clients had a greater awareness and education of the risks and the way that insurance products respond.

“The Asian PRI/TCI market is still inits infancy when compared to Europeor even the Americas, so there is work to be done to build understanding amongst many clients as to how PRI/TCI can be effectively used to manage and optimise capital, both for banks and corporate clients. Corporate entities can unlock real value through the use of PRI and TCI products. Banks in Asia have largely recognised this value but some are still limited in terms of application by regulation or internal requirements. I expect this situation will change in the next three to five years although it will be a slow process,” he forecasts.

Expertise hub

Singapore and Hong Kong have of course attracted a wealth of underwriting and broking expertise in recent years that has fostered a general increase in the level of awareness of credit and political risk insurance. “All the major credit insurers have invested in their teams across the region as they see markets such as China and Indonesia as areas of sustained growth,” says Aon’s Burke. “This has resulted in Hong Kong and Singapore having the capability to meet the majority, if not all, of the capacity requirements across the region.”

Will the new arrivals continue?

“As far as I can tell, the influx has peaked,” says Hudson. “The market needs time to bed down and develop and then maybe we will see more entrants. But for the time being I do not think there is a compelling business case for new entrants to set up offices today.”

“If we take into consideration that most meaningful players have already opened their local presence in Hong Kong and Singapore over the last five years, it is difficult to imagine that this trend will continue with the same pace,” chimes Guidicelli.

“I don’t think many more names will come,” echoes Ashworth. “There are eight or so PRI brokers already, so it is starting to reach saturation point. However this is a positive, as an increased broker pool can increase the education by the continuity of the message, particularly if those newer entrants are also looking into new jurisdictions. On the insurance side in Singapore alone there are now 18 underwriters, able to cumulatively write up to US$1bn, US$850mn and US$700mn for confiscation, contract frustration and credit risk respectively. So the market is pretty deep.”

Abizaid highlights that while Zurich is growing its businesses in Japan, Australia, Hong Kong, Singapore and China, he sees potential in Malaysia. “Malaysia Exim is very busy and is interested in reinsuring with the private market. There are some very strong Malaysian corporates which are investing in Asia and Latin America, and which have used PRI and see value in that.”

As well as the international insurers that are opening Asian branches or offices, one area that JLT would like to see develop, says Strong, is for some more local insurers to develop credit and PRI capabilities within Asia.

Aon’s Johnstone concludes that although there are now more specialist brokers operating in the region than was the case two years ago, “there is still a great deal of work still to do to raise awareness of the effectiveness of these products as both business facilitation tools and risk mitigants.”