2016 was not without challenges for the trade credit and political risk market, with the commodity crunch, the launch of the new Insurance Act and global political uncertainty affecting the whole industry, including insurance brokers and underwriters. GTR caught up with two winners of its 2016 Leaders in Trade awards for a discussion about the state of the market and the year ahead.
James Esdaile, Managing director of BPL Global, winner of GTR’s 2016 best trade credit and political risk broker category.
GTR: What was 2016 like for BPL Global?
Esdaile: It was a year of transition, with 2016 the first full year of Sian Aspinall and myself being managing directors. While there have been challenges, we feel it was a success.
We have been working on refreshing the brand for the first time since 2000 – including a new logo and website, which we think is more apt for the company’s current position and outlook. The rebranding is not an attempt to erase the past; it’s more about refreshing the look for the future.
Despite the current M&A trend in the insurance market, and a body of opinion suggesting that we can’t continue as an independent employee-owned firm, that is exactly our intention as we believe that is what our clients want.
The popularity and demand of the product is increasing and clients’ demands are becoming more voluminous and complex. We’ve added staff to cater for that. Our total headcount is now 94. A majority of the hires have been in London to keep pace with client demand, but we have also increased headcount in Asia.
The Insurance Act 2015, which came into effect in August 2016, is probably what people will most remember 2016 for. A lot of time was spent with clients, insurers and lawyers to address the uncertainty and adapt policies – many of which had been around for quite some time – to cater for the new act, particularly in terms of a client’s duties of disclosure and meanings for warranties.
GTR: What trends do you see in the market at the moment?
Esdaile: There are 55 to 60 direct players in the credit and political risk insurance (CPRI) market now. We have seen an increased problem – or wobble – list in terms of potential claims, which we think is leading to a tightening of insurers’ credit appetite. One of the big factors has been the sustained lower oil price beginning to take its toll. The insurers are now far better educated than they were five to 10 years ago; with an increasing trend in hiring former bankers as either analysts or front-office underwriters. They are taking a more peer-to-peer view of underwriting credit risk, rather than just being an underwriter in the classic sense of relying completely on their clients’ information and experience.
While we remain in a low interest rate environment – where a lot of capital continues to be attracted to the insurance market, and where insurers continue to invest heavily in the specialty areas of business – there’s an increasing trend for insurers to try and expand their offering in both trade and non-trade business. This means that there is an increasing demand from a lot of bank clients looking at covering areas of their portfolio beyond the commodity space, such as aviation, shipping, pure corporate lending, etc. We started as a market largely reliant on commodity-related transactions – whether energy, metals or agriculture – but when commodity prices collapsed a few years back, insurers realised the true extent and impact of reliance on this sector. While trade and commodity finance remains a very large part of the market’s activity, many insurers have therefore sought to diversify their portfolio into non-commodity-related lending.
GTR: What has driven the rise in demand for the product?
Esdaile: From a banking client point of view, there are two key drivers: diminished appetite for risk and a need to conserve capital. Also, generically speaking, the world isn’t exactly getting any more settled.
Traditionally the market’s sweet spot was emerging market risk, but in the past few years we have seen an increasing demand for developed world coverage. There’s a political element to it, but there’s also just an economic element to it. The need and desire to hedge credit risk is not something we see shrinking anytime soon.
The world isn’t getting any more settled.
James Esdaile, BPL Global
GTR: Geographically, where do you see the biggest opportunities?
Esdaile: There remains a lot of opportunity in Africa outside of the commodities space. That’s something we’re trying to look at. In South America, the return of Argentina as a credible nation and credit was also quite a big feature of 2016. Brazil continues to confound people’s expectations by always causing concern when it should be such a success story. We also see a growing demand in Asia, because of increased awareness of the product.
Europe is pretty saturated, and the product is well-understood. The US and Asia is where we, as a broker, see the greatest opportunity in the next year or so. It’s a case of education and awareness of what the product can do.
GTR: What do you expect for the remainder of 2017 – and 2018?
Esdaile: Whilst there is a wobble list, a lot of those cases may not translate into claims payments. By the end of 2017 we will have a better idea of how these current issues are likely to play out, and another year will show the extent of the impact of lower commodity prices. Hopefully 2018 will be a calmer year. I think we will continue to see a hardening of insurers’ credit appetite but client demand will continue to grow.
For BPL Global, we are pretty settled and well-resourced for the next 12 months. But given our size, and our independence, we are able to react very quickly to changing market conditions.
Nick Kilhams, Political risk underwriter at Chaucer, winner of GTR’s 2016 best trade credit and political risk underwriter category.
GTR: What kind of year did Chaucer have in 2016?
Kilhams: 2016 was a particularly difficult year for the emerging markets, if not the most challenging we have been through in many years due to all the problems caused by the drastic fall in commodity prices. Very few people within our market, or within our client base, were immune from this. Our clients, being the trade finance banks, commodities traders, etc, buy a high volume of insurance, although they also undertake many transactions that are uninsured.
We worked especially closely with our client base last year, to negotiate the choppy waters successfully. This sometimes meant the reprofiling of risk, rescheduling of debt and additional efforts to resolve as many problems as we could. We lead approximately half of the policies that we underwrite and so played an important role to ensure problems were solved so that the market could trade effectively.
Of course, whilst all of that was going on, we were also hard at work developing the business, including setting up a joint venture in Africa with AXA Africa Specialty Risks. The timing was perfect, since we started underwriting on its behalf in May 2016, enabling it to take advantage of a stronger underwriting environment following the events of the commodity crunch. We also benefitted from the uptick that follows a problematic period, with many of our clients looking to buy more cover. Africa is a great source of business – for political risk, trade credit and export finance. It produces so many different commodities in so many different countries that the opportunities there are vast.
GTR: What trends do you currently see in the market?
Kilhams: As everyone picks themselves up and dusts themselves down after last year’s commodity crunch, it is good to see that most market leaders still have a strong appetite for this business. Whenever you have a difficult period, you always lose someone along the way, but this aside, both the direct and reinsurance markets have responded robustly.
Most people are looking for the uptick in conditions which follows a major market event and have geared up their capabilities accordingly. Also, there is increasing appetite for longer tenors of risk coming into our market again, which means that the events of 2016 have not discouraged clients.
GTR: What’s driving the increased demand for the product?
Kilhams: In part, it is a response to the commodity crunch, with clients buying more insurance to protect themselves.
Additionally, it is indicative of the continuing evolution of the market – we are an integral part of the trade finance community. We are typically on the radar screens of investment banks and other financiers so that it is normal for them to consider us at an early stage in any transaction’s progress. It is all do to with awareness – our brokers are highly sophisticated and effective enablers in the trade finance arena, and we thank them for that.
Obviously, one of the key concerns for any insurance purchase is the quality of the claims process that supports it. Moreover, the commodity crunch has exemplified the speed, efficiency and effectiveness of our claims process.
We have a new normal now.
Nick Kilhams, Chaucer
GTR: Are we on the other side of the commodity crisis now?
Kilhams: The market is definitely strengthening. We now have a new normal, with a client base that is comfortable trading and doing deals in a world of stable oil prices at around US$50 a barrel. There is a definite sense of calm returning to the market – people have taken the time to step back and review their business exposures, and are now ready to move forward positively again.
GTR: What do you expect to see in the next couple of years?
Kilhams: While the trade finance community aims for calmer waters and leaves behind the commodity-related problems of last year, further political instability worldwide – as recent elections have highlighted – may continue to be a catalyst for change in the future.
Absent of any major shocks in the second half of 2017, we hope to see further easing of tensions going into 2018, heralding a period of greater calm and productivity in the trade finance arena.
We expect risk appetite to return if major commodity prices rise and, with a healthy slice of good fortune, the economic landscape by the end of 2018 should be more positive than we are observing now.
