GTR gathered prominent players in the US insurance market to discuss current trends, including extended payment terms and low premium rates, and what can be done to remedy the relatively low level of credit insurance utilisation among corporates.
Suzanne Garrod, head of the Americas, Zurich Credit & Political Risk
Jay LeClaire, region director, sales and marketing (Americas region), Euler Hermes World Agency
Agatha Liberatore, vice-president, senior underwriter – multibuyer trade credit, political risk, credit & bond, XL Catlin
Harpreet Mann, vice-president, QBE North America
Gary Mendell, president, Meridian Finance Group (chair)
Scott Pales, senior vice-president – political & credit risks, financial solutions, Willis Towers Watson
Jason Prevette, team leader, special products Americas, Atradius Trade Credit Insurance
Mike Treleaven, vice-president, credit, political and security risk, JLT
Toby Vass, political risk & credit, Chubb
Mendell: In a world of economic and political uncertainty, the need for credit insurance is greater than it’s ever been. At the same time, the amount of capacity in the credit insurance market is unprecedented, with more underwriters entering the US market all the time. So why aren’t we killing it? After all the years we around this table have been in the business, the vast majority of US companies and financial institutions who could benefit from the coverage still aren’t using it.What is holding the US market back?
Pales: From what I’m seeing in terms of recent developments from 2016 to today, we are seeing a greater influx of bank business, and with that much greater penetration.
On the financial institution side, activity in the US is extremely robust. That would stand on accounts receivable purchase programmes, supply chain finance, letters of credit and traditional asset-based lending.
Treleaven: It is a case of selective institutional memory. Going back to 1999, 2001, there were a lot of complicated claims, so there was a perception that the product didn’t execute as it should. Fast forward a decade and in 2007/08 we all saw that it absolutely did work, better than the alternative products such as credit default swaps.
We need to continue the effort to educate the market, to help them understand how the product has evolved and what can be done with the increased capacity. There is increased creativity and problems can be solved. Perception is just lagging behind what the reality is.
Mendell: What’s the underwriters’ take on the challenges?
LeClaire: Activity is very high. There is a lot of all kinds of transactions being done.
What I’m concerned about is the level of competition in the market between the banks. There are only so many prospects that so many banks are going after. Therefore, we tend to see a higher frequency of very eerily similar types of transactions from one bank to another. That’s something that we pay a lot of attention to.
In terms of the market for corporates, multinationals in the Americas have a very different risk perspective than our clients from Europe and elsewhere. That represents both challenges and a wealth of opportunities.
It all goes back to how we can provide value with our broker partners and prospects by way of education. I worry that we don’t do enough of that and add value there.
Prevette: I’m seeing a lot of bank-driven business – a lot of accounts receivable purchase programmes and supply chain finance, and the same deals circulated amongst banks competing for this business. So, not only do you have a lot of competition amongst the banks, but also amongst the underwriters which are vying for this business, because we’re trying to grow our book of business as well.
In general, on the corporate side, there’s still this mentality that credit insurance is a discretionary expense and it’s not a necessity at this point. We need to drive the value of the product and really promote it. With some of these corporates being perhaps more bottom-line driven, they don’t want to expend on this insurance, and it’s up to me to overcome that.
Mendell: Why do you think the corporate mentality and perception of insurance is so different between Europe and the US?
Pales: It’s a different environment. In Europe, they’re dealing mainly cross-border. They have different legal systems and languages, and so the aspect of trade credit insurance brings a great deal of additional security than you would see in the US.
Treleaven: The corporate credit culture in the US empowers credit departments to do their thing. Their view is that if they entertain bringing in this product, then it brings their value down in their organisation. You have directors of credit that have worked their entire careers to get to that point, and if their idea is to bring in credit insurance, I think they believe it would reflect negatively on them.
Mann: The focus has to be on education and getting corporates to understand the risks that credit insurance is covering. Perhaps as an industry, we don’t articulate that enough. If you look at cyber risk, cyber coverage has been articulated so well at the board level, so why aren’t boards approaching concentration or credit risk in a similar fashion with a view to protecting one of the corporate’s most important assets, its receivables?
Liberatore: It’s also important to keep in mind the historic perspective on the product in this country. This is a product that’s been created and used by the European market essentially before it ever hit the US. Couple that with the fact that there is a cultural difference in how corporates, especially, view trade credit, because there seems to be a higher tolerance for risk-taking by the US companies. That may be because of the lack of cross-border risk, comfort in adequate bankruptcy laws, and comfort with the traditional export markets of Canada and Mexico. That comfort may be waning, but I think that that speaks to this market being a bit different. The higher risk tolerance of the market is underscored by the fact that you have many different credit insurance risk models in this country, hence the excess of loss approach which is a bit more popular in the US than it is elsewhere.
Having said that, there’s a shift in terms of the business that we’re seeing in our applications. If you’d asked me five years ago, it was pretty much 50% risk transfer, 50% finance-driven. Now there’s a significant shift away from risk transfer to finance, and financing of the accounts receivable (AR). That’s where the problem is. That’s where I think that you’re seeing a decline, because post the financial crisis, you had that dearth of financing options for AR. The market is starting to come back again, you’re starting to see more and more supply chain finance, but I don’t think the penetration is there yet.
If you look at the other markets, Europe and Asia, there are a lot more creative AR financing options than there are in this country. We’re just starting to talk about supply chain finance and that’s growing, and I think that will be the future, because from a corporate standpoint, that is where they’re going to see the most value added.
So, the question is, what are the finance companies and banks prepared to do? Are they prepared to get a bit more creative, given they have regulatory pressures nowadays so it’s not as easy as it seems?
Treleaven: One of the biggest issues is that companies don’t even evaluate what the cost to transfer risk is, to get to the point of getting it to an underwriter to actually look at the portfolio. When we talk to our clients or our prospects, we say, I think you owe it to the company or to the shareholders of the company to evaluate the price of transferring that risk, and if it’s a fair price and it makes sense, then they should feel obligated to negate that risk. But even just getting to the point of finding out what the cost of the risk is, that’s the challenge. We can talk about price and what is actually being transferred, but half of the time we’re not even getting to that point with companies.
Garrod: When you are talking about targeting the middle market, it is really important for the carriers to have the technology in place to efficiently manage those applications, because it is more labour-intensive.
LeClaire: Companies don’t really take a full analysis of what the solutions bring to them. We have a risk-tolerant environment where companies devote money to their credit manager and this credit manager runs a tight ship: their days sales outstanding (DSOs) are excellent and they haven’t had a bad debt loss. If we do get to discussions of pricing, they do an immediate cost benefit analysis: ‘The premium is US$40,000? Well, we only wrote off US$20,000 last year, thanks for coming in.’
But if we got a little further, we could explain to them that, well, your top 10 clients represent 60% of your sales, and three of them have this risk grade and two of them are in Mexico, and one of them doesn’t pay – but you never get that far. It goes back to the fundamental goal of what are the client’s objectives, and can we take the approach to give them the tools to get them off that insurance enigma and challenge them. Because they in fact do have a fiduciary responsibility to their business to explore ways in which they can mitigate their trade risk, and also to grow their business.
Liberatore: The extended terms are the key to growing the business for them. From a supplier’s perspective, when they are asked for extended terms, they have two things going through their mind: A, how am I going to fund the extended terms? Is it going to be through operating cash? Is it going to be through financing? And B: the economic part of the extended terms will allow them to make a larger sale. It’s an economic question. That is going to be a focal point of discussion for them when we talk about extended terms.
Pales: That would give rise to selection in itself, where a corporate may be comfortable looking at 30-day risk horizons, but then when they are presented with 120-day or even 180-day risk horizons, that changes the game entirely, both in terms of the time period as well as the amount of aggregate exposure.
Mendell: Across the board, and particularly in the context of supply chain finance, are you seeing coverage of longer payment terms being requested by insureds?
Pales: It’s commonplace now in these bank programmes of supply chain finance that we are seeing terms of up to 360 days. What is driving that is the competition: banks are jockeying for this type of supply chain.
Vass: This pushing out of terms has become very interesting, because no one is really adjusting their pricing based on that. There are some really weird situations where you’re looking at a corporate that maybe has a senior secured asset-backed borrowing base facility that has a 3% margin on the bank facility, and then people are writing unsecured trade credit risk on a supply chain finance platform. This actually divorces it from any benefit you might have from a preferred creditor status; you’re just an unsecured creditor at that company with a potentially one-year attachment, 360 day run-off period, and you’re getting 1%. It’s completely irrational.
Mendell: When a product is consumed or resold 60 days after delivery but the payment terms are inflating to 90, 120, 180 days, are we moving away from the economic realities of the underlying transactions in the direction of unsecured working capital financing? Still – an insured may have no choice but to extend longer terms in order to compete.
Liberatore: It’s sending the wrong message. Basically, what you’re saying is, yes, we are willing to take on the same amount of risk or higher risk at the same price or lower. This is not a commodity we are selling; this is a very specialised product, and there is a risk/reward concern to be had.
Prevette: As insurers, we are taking on more risk for less premium, and we are also taking on terms that are longer than typically done. Where we are seeing these terms go up to 360 days, we are actually playing into this, and we are enabling this to happen because we are agreeing to it. So it has become common.
Mann: We can’t dictate the terms on which corporates trade. So, if 85% of trade is conducted on open terms, it’s natural that in order to remain competitive, corporates are going to continue extending their terms – and this becomes more risky in certain industries where the margins are small. We have to assess the risks and decide if we are able to cover the risks.
Vass: Yes, but what the market insurers can control more is the extent to which they facilitate the pushing out of payment terms by banks who are competing over who can drive out the longest supply chain terms.
Pales: From a pricing perspective, what we are seeing is a great deal of new capacity that has entered the US market for the past couple of years. By some of the combined ratios that I am looking at over the last couple of years, it’s not a soft market. You’re talking about a number of insurers sitting at +100 combined ratio. That should signal some tapping of the brakes, right? But it’s not. We are still seeing very aggressive responses from a pricing basis: longer terms being priced as shorter terms have historically been priced.
Mendell: The gap is increasing between the value credit insurance adds for our insureds and the premiums they’re paying for their coverage. Whatever the reasons are for our product’s depressed pricing – whether it’s on the insurance market for enabling premium erosion or it’s on our insureds for demanding lower costs – how are insurers’ willingness and ability to underwrite credits affected by your premium income?
Treleaven: Going back to interest rates and the money supply, as long as that continues to be the case, then pricing will remain soft. We saw Lloyd’s of London last year report a pretty significant loss, over US$150bn in catastrophic claims, in the property and casualty market, but they were recapitalised before the end of the year. That is going to keep pressure on pricing to stay down.
What our clients value is the consistency of pricing. We go to market, there is a pretty big spread from one carrier to the next, but I think it’s a matter of how it gets underwritten. I really like the insurers that take more of a macro view, not just of the risk, but of the commercial terms. When you find insurers that have a separate house doing commercial terms versus risk, you get a very big mismatch in policy and you have really low pricing that insureds are staring at, even though the risk transfer isn’t equal to what’s going on. Again, education is a big part of that, but that’s where it really drives the pricing even softer than what is reasonable.
Prevette: Within Atradius we’ve seen more focus on being well capitalised. Our Solvency II ratio is making sure we are pricing the risk the way it should be.
Mendell: The way we wish our insureds were running their credit departments often differs from the reality. Ideally insurers seek to partner with insureds that obtain financial statements and maintain complete and current credit files on all their buyers. Increasingly the real world doesn’t look like that. What does this mean for insurers? Are you finding other ways of getting information? Requiring bigger deductibles? Extending larger discretionary credit limits?
Garrod: Our multi-buyer team is looking at ways to expedite our decision-making so that we are as efficient as possible in getting back to customers.
Mann: A lot of insurance companies are looking at insurtech solutions as well as data and analytics across the business, not just within trade credit. One thing we’re seeing with respect to small-sized entities is that they’re looking for technological solutions, and fintech is a space that some of these entities have been looking to for credit functions as well as financing. The fintechs often use data and analytics to review credit decisions. It’s an interesting space we’re watching, not only in terms of how technology can help us, but also how it can help our customers.
Pales: For many of these insureds, they’re meeting the challenges of lack of financials with a little bit of creativity. They are looking at things like a company’s visit report, they are looking at trade history. They are certainly open to structuring transactions on a tranche basis, where for example a more difficult tranche without financials would have a higher deductible and perhaps higher pricing. It wouldn’t just be a higher pricing irrespective. You’d have the deductible protecting against that theoretical lack of visibility.
Treleaven: From the insured’s perspective, I don’t think you’re necessarily going to change the information that is available for them. And the main reason is that, whether they are in services or in manufacturing, almost all of these organisations will tell you that they are a sales organisation. The pressure on sales outweighs the pressure on the credit risk.
LeClaire: Clients have become much more open to collaboration. Before, it was a case of, ‘I am paying you, you figure it out’. Now it’s a case of, ‘let me get a payment history’. Financials are necessary in many cases, but sometimes just a 15-minute call with the controller to get some verbal numbers can facilitate that approval.
Treleaven: Along those lines, what weight do you put into a client’s buyer utilising credit insurance?
Liberatore: For me, it would depend on the reason why they’re using the credit insurance. If it’s purely risk transfer, then clearly they are concerned about the risk. We are quite capable of identifying where the source of the concern is. If it’s finance driven and they are not really into the credit insurance part, but they are doing it because their financial company wants it, then there’s an additional comfort from an underwriter’s perspective when we see that. It shows they have that risk tolerance for their book of business, and are really just focused on the working capital need. Those are two different pictures.
Mendell: Which is a more attractive prospect for credit insurance? A company that has terrific credit and collection procedures, doesn’t let anything slip, visits its debtors wherever they are, and has a robustly-staffed credit department – but because of the industry it’s in, or the nature of its fortunes, it takes hundreds of thousands of dollars of bad debt losses every year? Or a company that has limited credit procedures – an order comes in the door, they ship it, no formal collection procedures, etc – but it’s been in business many years and have never taken a loss?
Liberatore: Definitely the former, because we don’t know what is going on with the latter company. They could be just lucky. That may be hinged on an individual or two that for whatever reason has a relationship, knows the customer base, or it could be a product distinction.
Treleaven: With the former, you know what you are getting into and you can structure the policy in a certain way and it is equal on both sides and the risk is shared.
Mendell: Moving on to US Exim. None of us know if Exim’s going to come back to what it once was, which was less than it could have been amongst other ECAs, or if it will remain compromised. Do you see any impact or opportunity strategically, particularly from the underwriting side, if Exim is not resurgent?
LeClaire: Yes, of course. But it would be terrible if US Exim went away all together. It’s good for business, but there are obviously certain situations where we’d become a beneficiary because it’s a disaster. And that’s not a good thing.
Mendell: When US Exim’s authorisation lapsed in the second half of 2015 we saw a flow of insured exporters into the private sector. What have you seen in the past six months or year?
Vass: We have seen surprisingly little, actually. When the shutdown first happened, I expected to see some business as a result of that, but I was sceptical that it would be a huge amount. My view of Exim is that its sweet spot is very different from ours. Its sweet spots are the very large transactions which we are not going to be able to help on, or the small challenging exports which, again, are probably not going to be a good fit for us. I didn’t expect to see a huge amount, but I’ve been surprised by how few enquiries have come to us because of the Exim situation.
Prevette: My perspective is similar, as we’ve seen very little Exim business flow our way, at least for the middle market and above. This points to Exim as perhaps not just another underwriter we compete against, as they did some transactions that were rather unique that don’t necessarily translate well into our product offerings in terms of size and scope. We simply do not cross paths with Exim in our markets.
Treleaven: What we’ve seen over the last couple of years is that it’s been a pretty benign environment, so Exim is not exactly as needed as it was. Whereas if there is an economic downturn, if the dollar weakens, if commodity prices continue to go up, all of those things combined would be kind of the perfect storm for Exim.
Garrod: At the same time, other ECAs have really evolved to be even stronger supporters of their exporters. I think that there is definitely recognition that there is a lot more that Exim could do to catch up to its ECA competitors if it were able.
Mendell: Credit insurance is central to international trade, but in the US market the coverage doesn’t come up in a lot of settings where it ought to. We need to get more deliberate about inserting credit insurance into the conversation. Whether the persistent underutilisation of credit insurance is due to lack of education or cultural, regulatory, or other issues, the challenge to develop the US market is still before us.