Paul Kunzer, Head of Portfolio Trade Credit at Liberty Specialty Markets (LSM) North America, examines how the insurance market and LSM are responding to the intersection of innovation with the potential for a challenging macro-economic environment ahead.


It’s fair to say that since the economic recession of 2008, the market for trade credit and structured trade insurance products has achieved a speedy and solid recovery, if not a fully-fledged renaissance. The timing is good. Macro drivers such as heightened global risks and increasing regulation combined with new product development and technological innovation are creating an unusual business environment. The need for businesses to protect themselves against risk and simultaneously take advantage of opportunities has rarely been greater.


Smooth sailing or perfect storm?

Today, the number of insurers responding to the needs of the financial institutions, multinationals, corporates and small businesses has grown almost exponentially. The greater the number of players, the greater the demand for differentiation and new ways of looking at risk, so the breadth and depth of product offerings have increased accordingly. A great time to be an insurance buyer, you might say! But this has taken place against a backdrop of change at an ever-increasing pace. Right now, our industry is approaching an intersection, at which the pace and growth of insurance products and structures meet increasing regulation, trade tariffs and political risks. The approach of this collision has delivered some rather idiosyncratic macro-economic and political shocks.

When confronted with the reverberations of these shocks, insurers and their partners alike will need to choose how to respond. These choices will shape our future growth – and hopefully plant the seeds for the next renaissance fuelled not just by the aftermath of a financial crisis but by nascent technological and operational advancements such as blockchain and artificial intelligence.

Opinion is divided as to when we’ll actually arrive at this intersection. Faced with something on the scale of Brexit or global trade wars, organisations have to cast their rune stones and interpret what they see. Those interpretations are clearly reflected in the challenges and requests that are now being presented to us. Being in a position to respond proactively to clients while maintaining flexibility in underwriting and keeping an eye on the long term is critical as we all attempt to find direction.


Employing insurance as a flexible business tool

As companies attempt to make sense of this changing environment, demand for insurance solutions to financial risks is increasing, particularly from the financial services sector. The insurance market – particularly in the US – has yet to persuade corporates just how central financial risk solutions can be in helping them to meet their overall objectives. The value is not just about getting credit risk off a corporate’s books, it’s about what it can do for the organisation on a more holistic level by helping to achieve strategic objectives: for example, freeing up capital, improving business performance, or creating competitive advantage.

Looking ahead at the approaching intersection of new products and looming storms, theory tells us that the greater the access we have to information, the better our ability to both forecast where we’re going and adjust more quickly to events. At least, that’s what we’ve been led to believe. But the sheer scale of many recent events seems to have thrown that nugget of received wisdom into reverse. Sure, we have impressively granular data, but these events just seem to defy analysis, which explains in part why leading players are reaching so many different conclusions about how these events will play out. These varying future assumptions, in turn, are fuelling very different approaches to risk, capacity and appetite.

The way in which insurers respond to the interpretations and strategies of our clients, partners and counterparties is key. Do we see things the same way? If not, what are the best ways to continue to support banks and corporates while maintaining underwriting standards based on risk assessment? A long-term view and close client relationships are critical to maintaining the flexible support needed in an unpredictable environment.


Holistic risk management

With this in mind, talking about financial risk solutions purely in terms of a binary decision as to whether there’s enough risk in a particular transaction to require insurance or not pains me. It’s a perspective that leads to seeing financial risk solutions as something of a commodity. It’s not. A proper holistic risk management strategy is critical at this time – one that takes account of the volatile risk landscape and the pace of product and technological change. It’s a strategy that clients and partners can use right across their organisations and with the growth of innovative solutions and the increasing sophistication of the financial services sector, there are more solutions at their disposal than ever.

The volatile risk environment, coupled with an enhanced ability to break down a risk, analyse it and put a price on it, has broadened the underwriters’ playing field. New online platforms for accessing insurance solutions, such as blockchain and artificial intelligence are available for the industry to develop and test. How will these platforms respond to the challenge, if and when it materialises? Will they be ready for a potential tide of claims? I suggest we all need to be active in supporting and developing these platforms, perhaps to create standards, perhaps to offer something new. Once ready, they can be great providers of efficiency and liquidity within the trade credit insurance industry.

The good news is that while some parts of the world may appear to be volatile, we have yet to see any big losses in terms of major defaults. We have a window of opportunity to offer our clients thoughtful new solutions, and demonstrate the wealth of solutions and opportunities available to them. According to Microsoft founder Bill Gates: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. Don’t let yourself be lulled into inaction.”


Strength through mutuality

At Liberty, our response to market conditions has been to build a strong team and position in political risk and structured credit in a relatively short time. We have a remarkably diverse product offering responding to the risks and trading relationships of our clients, with each one offering further customisation. With the growth of our North American and Asian teams, we’re expanding our products into multi-buyer and portfolio trade credit, enhancing the offering of our core European-based teams.

The response from our brokers and clients to the launch of our short-term portfolio trade credit product has been outstanding. Adding portfolio, short-term trade credit insurance helps to continue to round out our solutions. The success of this US launch has encouraged us to enter the Canadian market in the near future and then take a view on where to focus on after that.

Liberty’s status as a mutual insurance group is part of the reason we’re able to operate with a view to the long term. On a personal note, as a relatively new arrival here, I can tell you that being part of a mutual is a very different experience to working for a publicly-listed organisation. At its most fundamental, the difference means we can take a long-term view while others must default to more near-term thinking, this feeds through to virtually every activity we’re engaged in. That’s vital for Financial Risk Solutions because this is fundamentally a long-term sector built around relationships. Yes, you’ve got to keep an eye on your near-term objectives, but it’s the long-term that separates winners from losers. If an insurer wants to succeed in a future built on blockchain and artificial intelligence, you still need good old-fashioned relationships with clients and brokers built on trust and mutual respect, as well as an eye on the future.

So as we approach the intersection of product expansion and technological innovation with heightened global risks, we at Liberty continue to strive to keep our eyes on the short and the long-term, the single exposed risk and the entire enterprise risk, and the future world wherein this intersection is deftly managed by ourselves, our clients and our industry as a whole.