The insurance sector is finally seizing the opportunities created by the digital revolution, and the Euler Hermes Digital Agency (EHDA) is an excellent example of how traditional trade credit insurers can embrace disruption.
Digital disruption has been a buzzword in the trade finance industry for a few years now, but the first mention of the word “insurtech” in these pages dates back just one year. In August 2016, GTR listed the new technologies that had the potential to change trade credit insurance. Now, Euler Hermes is testing them, scaling them and selling them, hoping that innovations such as artificial intelligence (AI) and blockchain can make it possible to reach the estimated 95% of trade that is currently done without trade finance or trade credit insurance instruments.
Christophe Spoerry, who heads EHDA along with Louis Carbonnier, explains: “Euler Hermes and its competitors are basically insuring 5% of trade, and the other 95% are the freelancers in the US who do not get paid by the company they work for and therefore are very sensitive to non-payments; it’s the Chinese exporters who don’t know who they’re dealing with when they sell something on Alibaba to someone in Germany for the first time; it’s companies in Rwanda and India and all those geographies that have been left aside by the development of trade credit insurance.”
EHDA was established in June 2015 with the goal of reinventing trade finance by partnering with innovators to better manage credit risk. “When we started, our goal was to identify the trends in this industry, explain them to Euler Hermes management, get innovators interested in what Euler Hermes does and start with a blank sheet of paper again. Trade credit insurance was invented years ago and could be redesigned with the technology and data there is around today,” Spoerry says.
He recalls how, at the beginning of the venture, most innovators had no idea what this type of insurance was, and that EHDA had to reach out and educate them on the product. But after a few months, technology companies became very interested, and quickly started coming up with fundamentally new approaches.
Initially comprised of just three people, the core team now totals some 15 staff members, with a further 25 freelance staff regularly working with EHDA. The Digital Agency co-founders, Spoerry (who came from a tech and start-up background) and Carbonnier (who worked in financial services before joining Euler Hermes), have equal weight in all decision making. They both report directly to group chairman Wilfried Verstraete which, according to Spoerry, has been vital to EHDA’s quick development and success.
“We run it as two brains and it’s a very interesting and much more balanced approach than typically in these sorts of innovation initiatives,” he says. “It’s like a partnership in a consulting firm, where the two of us are the core and bring lots of people in, giving them the most powerful set-up they need in order to effect change in this industry.”
Structurally, the Digital Agency is divided into five teams:
The Innovation Lab follows trends and tests new concepts. As innovation happens everywhere, EHDA opened hubs in London, New York and Hong Kong, on top of the initial Paris office. In London, EHDA is headed by Raphael Caruso, previously strategy and fintech manager at Direct Line Insurance Group, where he articulated the group’s fintech investment and partnership strategy and worked on innovation projects including analysing the impact of driverless cars on the insurance industry. His role is to connect with the insurtech industry, but also to make sure Euler Hermes management understands the value of these innovators.
The Data Lab was spun off from the Innovation Lab, to specifically work on new algorithms and new data sources, applied to the current business of Euler Hermes, be it for risk or marketing activities. “There is so much potential for the near term for Euler Hermes, by bringing data science skills into the equation, that we had to have a dedicated team working on these short-term opportunities.The rest of EHDA’s thinking is really long-term,” says Spoerry.
The New Business Factory takes successful experiments out of the Innovation Lab and scales them up, sometimes in partnership with other innovators. “Maybe one day we will build all those technologies ourselves, but for now it is just faster to build an ecosystem of very bright people with very strong AI skills, and find a way to collaborate on the biggest challenge, which is to go after the 95% of B2B trade that is not insured or doesn’t use trade finance,” Spoerry explains.
The Digital Culture team organises conferences, hackathons and entrepreneurship programmes to introduce these innovations to the rest of Euler Hermes staff, and help everyone contribute to building the bright future of credit insurance.
The Digital Ventures team works on promising ideas that are not yet scalable within the Euler Hermes organisation. “Sometimes we realise that we cannot really scale one of our ideas very efficiently. We think these ideas would develop themselves much better and faster if they were just a spinoff from Euler Hermes, with a very strong partnership with Euler Hermes,” he adds.
Single Invoice Cover
In the first year of its operations, the Innovation Lab did approximately 100 experiments, half of which resulted in “validated learning” – a clear picture of what worked and what didn’t. Out of these, 20 were deemed ready to go to the next stage and, currently, the New Business Factory is working on four different products. The most mature of them is Single Invoice Cover, a transaction-by-transaction insurance product and an Application Program Interface (API) that has been operational for about a year and counts fintechs such as URICA, Hijro and Flowcast, as well as large players such as Crédit Agricole Leasing and Factoring, as users.
“We believe Single Invoice Cover will address a market that did not exist so far – we don’t really know how big that market is. But we also see that Single Invoice Cover is an excellent fit with B2B marketplaces like Amazon or Alibaba. Marketplaces typically don’t look for traditional credit insurance, but the fact that it’s API-based, real-time and really easy for the end user to understand means that it has grabbed the attention of some of the big marketplaces. Here the market is more quantifiable and we think the product could be adopted on a large scale in two to four years,” Spoerry explains.
The development of Single Invoice Cover started in August 2015 when EHDA met with Skuchain, a fintech aiming to digitise trade finance transactions through blockchain technology. After the initial contact, Skuchain asked for an easy-to-use API to work with – something that Euler Hermes did not have, and that EHDA created. “It was a very simple overlay of existing systems at Euler Hermes with a sort of bypass to make sure that anybody who knew about it could use it,” he adds. “Step by step, lots of innovators started hearing about it, adding requests to it, and it became Single Invoice Cover. There were probably 100 different innovators who helped create it, and all their contributions, little by little, materialised the opportunity of creating a very tech-oriented product in this space.”
Despite demand from hundreds of companies, Single Invoice Cover is still working on a relatively small scale for various reasons. First, it takes some time to get regulatory approval in enough countries to reach a larger scale. And second, EHDA doesn’t want to “open the tap too fast” before understanding the risk profile of the new business generated by Single Invoice Cover. “But the product is live, and feedback is amazing. One broker said trade insurance is sexy again, which is not something you expect to hear about often in trade credit insurance, so that was a nice feeling,” laughs Spoerry.
Single Invoice Cover differs from traditional trade credit insurance, which is usually whole-turnover, and is targeted at SMEs, freelancers and other e-commerce platform users who usually transact on an open account basis. But targeting a whole new market with a whole new concept has its challenges, mainly in terms of communication.
“It sounds strange, but we come from such a different world that even for Single Invoice Cover, which speaks well to banks and traditional clients of credit insurance, we struggle to find exactly how to speak about it and how it can ring the bells of start-ups, freelancers and other potential clients. Because we are literally starting from a blank sheet of paper, we are also questioning whether we should even call it credit insurance,” notes Spoerry.
This specific product still looks like credit insurance, so it will probably be called something along those lines, but Spoerry believes that other innovations could have entirely new names. “Something a lot more descriptive than the way it’s been labelled so far. That’s the only way we’ll be able to go after the 95% that haven’t heard about it.”
One such product that EHDA is working on is a spin-off from Single Invoice Cover called Traffic Light. Some Single Invoice Cover customers requested a way to instantly get an opinion from Euler Hermes about the credit risk of a given invoice or company, and the Traffic Light system was created as an add-on to Single Invoice Cover. There was so much demand on this element that it will now become its own standalone API. This will be a way to educate people who haven’t been exposed to the notion of credit risk yet, and will also give them the option, after reviewing that risk, to insure a transaction with a simple click.
Evangelising the industry
According to Spoerry, the platformisation of trade is changing both risk and the perception of risk, while the advent of Big Data is giving risk information access even to small players. The combination of these two factors has created tremendous opportunities for trade credit insurance, but only if the sector manages to reinvent itself.
“It makes no sense that a CFO is still accessing interfaces that look like the 1980s when they can use iTunes at home. We believe there’s a really nice future for traditional credit insurance, but improved. Traditional credit insurance on steroids in a way, powered by a lot more data, a lot more technology behind the data, and sold in a much more user-friendly manner,” he points out.
Like in other segments of the trade digitisation process, collaboration is needed to reach critical mass. But there doesn’t yet exist a consortium such as R3 in the credit insurance space. Spoerry says Euler Hermes hasn’t proactively approached other insurers, but is open to collaboration. “If more insurers were trying to innovate like us, it would help a lot to unlock the mentalities across the sector. Our job is also to source the opportunities inside and outside Euler Hermes to make sure that everything that is possible with new technologies is actually done in the industry,” he says.
For example, each insurer currently has their own locked IT system containing valuable information about companies worldwide. Sharing this information within the sector would empower it to reach the ‘other 95%’. Spoerry imagines a decentralised database containing data about millions of companies, but admits that it would be very challenging for Euler Hermes to make it happen alone.
“There is evolution on the borders of this industry and Louis and I have managed to create a model in terms of how we position the innovation team within Euler Hermes, and how we bring innovators into this space. If others start to do it, it’s going to be great,” he adds.