As trade insurers conjure up new digital tools and capabilities to keep pace with the rapidly digitising world around them, the future of the insurance sector is taking shape. But with multiple initiatives from numerous players, whether this future will be a fully automated, commoditised market or simply a slightly more streamlined way of underwriting risks for individual providers remains to be seen. Eleanor Wragg reports.
Once the financial services industry’s technological laggard, the trade insurance sector has recently leapt into action, racking up decades’ worth of progress in the last two years. From replacing clunky, error-prone manual processes to partnering with third parties on entirely new tools, players within the insurance market are supercharging their digital transformation in an attempt to bring their business firmly into the 21st century.
Most activity so far seems to have been concentrated on the creation of digital platforms and marketplaces for trade credit insurance that allow financiers and corporates to request insurance with multiple underwriters through an online process.
One example is the LiquidX Trade Credit Insurance Marketplace. Initially launched by broker Marsh and underwriters Allianz Trade and Atradius, it gives banks, non-bank investors and corporate suppliers the ability to request quotes directly from multiple underwriters and electronically execute and process insurance policies. Another, Tepfin X, developed in-house on broker Howden’s xTrade platform, is a digital marketplace which matches risk with capacity, and currently counts over 40 insurers. Meanwhile, WTW’s Mercury, an electronic placing platform for insuring payment default risk, enables clients to bind insurance coverage directly online, with instant access to quotes from a wide spectrum of insurers.
But although these platforms are solving for an important pain point in the market, these pockets of innovation are just that: isolated initiatives that only represent efficiency gains for some players.
“Everyone is doing a bit, but creating multiple and unconnected value propositions doesn’t really lead the industry as a whole anywhere,” says Alexia Boutin-Somnolet, chair of the International Trade and Forfaiting Association (ITFA) insurtech working group and head of Marsh’s lenders solutions group
in continental Europe. “No insurer is going to independently subscribe to all the brokers’ and banks’ platforms. Banks are not going to invest into all of the different brokers’ platforms. There is a cross-onboarding problem at every level, and there is not really a first-mover advantage because while these platforms exist, none of them represent an industry utility.”
She is also sceptical of the possibility of any of the existing platforms breaking out of their siloes to become an industry-transforming service. “Some platforms that we see are proprietary and typically represent significant sunk costs from market stakeholders who are so vested that they’ve become closed to wider market or utility alternatives,” she tells GTR.
Reticence on the part of industry players to join competitor-led platforms isn’t a new problem in trade.
The TradeLens initiative, launched by Maersk and IBM to streamline the shipping sector with blockchain technology, initially struggled to attract carriers outside of the Maersk Group, with Marvin Erdly, global trade digitisation leader at IBM Blockchain, telling GTR in August 2018 that carriers were “worried about too much Maersk control”. After revising its partnership model to distribute the venture more broadly in the industry, the platform has since managed to onboard Maersk competitors such as MSC and CMA-CGM – although still hasn’t attained fully global scale.
“We need a utility that everyone funds, like a Swift sort of situation,” says Boutin-Somnolet.
Speaking the same language
As is the case in the wider trade finance ecosystem, the lack of an agreed-upon way to refer to the vast number of financial products, counterparties and techniques in this highly complex and very traditional market is also holding back progress.
“There are so many ways of discussing the same thing with a different name, depending on the institution or the geography,” says Boutin-Somnolet. “We really need a kind of taxonomy or definition of terms so that certain fields are completely aligned. The basic terms are standardised, yes, but there are many other things that are just handwritten into a contract which makes the insurance quite difficult to commoditise.”
“It’s really about interoperability. The more the terms are aligned, the easier it will be to digitise them,” she adds.
The launch of the single risk credit insurance data standard in 2021 was a major step forward in this respect. It was developed by Dialogue Exchange, a UK-based independent credit and political risk insurance platform, alongside credit insurers Chaucer Syndicates, Allianz Trade, Liberty Specialty Markets, Sompo International, Talbot Underwriting and Tokio Marine HCC in collaboration with specialist brokers Miller Insurance Services, Cofarco, Aon UK and Aon France. Designed to provide data integrity, accuracy and consistency across the market, it sets out unified terms for field names, counterparty industries and cover required for structured credit transactions across a number of deal types.
However, it only covers single credit risk insurance, and, to drive a more streamlined future in trade credit insurance, further work is needed to enable all parties across the insurance sector to be able to connect to each other and easily share information in the same digital language.
“The positive side is that trade assets like letters of credit and guarantees are perfect for standardisation,” say Boutin-Somnolet. “They’re a really good starting point, but we shouldn’t try to align and digitise everything. A very structured deal, for example, will be always very difficult to digitise because there are way too many contracts and specificities.”
Agreeing on what to solve for
Another challenge to digitising the insurance market is figuring out what exactly needs to be solved for. Trade credit and political risk insurance is a vast landscape covering numerous specialist needs, and solutions must be found that not only facilitate better interaction between clients, banks, brokers and insurance companies but also drive a speedier insurance industry overall. However, there are almost as many opinions on what those solutions should look like as there are participants in the market.
“There are so many different needs within different insurance markets, and trying to address all of them at the same time is probably a trap that some platforms have fallen into: they promise the world and in reality fall short,” says Boutin-Somnolet. “What could be doable in one market would be very difficult to achieve in another: you couldn’t automate a bespoke project finance transaction on an electronic platform, but you could do it on the trade credit side. What also complicates matters is that there are very few people who have worked in these really different markets and who have that overarching view of how to consolidate multiple assets classes and instruments into the wider trade ecosystem.”
What everyone does agree on, though, is that increasing the accessibility of insurance through digital transformation is key to expanding everyone’s business.
“Digitisation offers a way to grow your addressable market,” says André Casterman, chair of ITFA’s fintech committee and chief executive of the Trade Finance Distribution Initiative. “It’s not only a way for credit insurers to better work with banks and corporates, but also for the whole credit insurance market to be more accessible to institutional investors and those who are providing funding.”
New solutions for the new economy
For a growing number of insurers, one important opportunity to boost their market reach lies in the burgeoning business-to-business (B2B) e-commerce sector.
In the US alone, B2B e-commerce sales soared by over 22% between 2020 and 2021, according to figures from market research firm Forrester, while McKinsey calculates that businesses and consumers in Asia – home of the world’s most avid online shoppers – will account for 57% of the growth of the global e-commerce logistics market between 2020 and 2025. As this virtual trade route, carried out over interlinked computers and mobile devices, becomes an essential global artery, financial services players who can position themselves at the heart of the action stand to gain a disproportionate share of the value.
Banks and fintechs are already working to achieve this. In 2021, for example, HSBC started to pilot the use of merchant data from HKTVmall, a Hong Kong-based online shopping and entertainment platform, to provide a new digital trade finance solution to e-commerce sellers, leveraging turnover and refund records of different types of goods to analyse and forecast vendors’ business performance. This followed a similar initiative by the bank from 2020, where it used merchant metrics provided by Alibaba’s logistics arm Cainiao Network Technology, such as business background, primary brands, real-time inventory and receivables information, to carry out credit assessments.
Fintechs offering B2B buy now, pay later (BNPL) – collateral-free, short-term credit that solves for the critical problem of access to supply chain finance for small and medium enterprises (SMEs) in the e-commerce space – are also on the rise, with start-ups such as such as Berlin-based Billie and Mondu landing millions in recent funding rounds.
But it isn’t only financiers who are finding entry points into e-commerce. A critical aspect of online B2B marketplaces is to help businesses find and connect easily with new trading partners, and this means taking on new risk – which, if credit insurers can bridge their way into this digital world, means an exciting new business opportunity.
The traditional way of putting a policy in place – a long, tedious and multi-step process – doesn’t lend itself easily to the high-volume, real-time world of online trade. But by digitising an insurance policy and the invoices it covers into smart contracts, and connecting them directly to e-commerce platforms, credit insurers can embed themselves into the new economy.
“The most famous phrase these days is embedded finance. That is really what e-commerce is all about,” says Özlem Özüner, head of e-commerce operations and finance at Allianz Trade, which recently struck a partnership with e-commerce platform Two to grow its footprint in the BNPL space.
The collaboration, by which Allianz Trade insures domestic and international payments between e-merchants onboarded onto Two and their buyer customers, uses an application programming interface (API) to integrate the underwriter and platform’s internal systems, enabling Allianz Trade to provide instant decisions on credit requests from buyers, covering the e-commerce platform against the risk of the buyer defaulting on the deferred payment.
“Everyone is seeking scalability, better customer engagement and efficiency,” says Özüner. “We have been doing analytics for hundreds of years, but making those analytics work for today’s digital world means a change in culture. By embedding ourselves into platforms, we want to continue to mitigate risk, but do it in a digital way. Traditionally, credit insurance is quite labour intensive for specific risks and geographies: you may need to underwrite risks quite manually. On e-commerce platforms, we have to get to know the buyer before the point of checkout. This requires us to analyse the data and give instant risk decisions.”
While integrating credit insurance into e-commerce platforms is an important driver of digitalisation, it’s far from the only one. The rapid rise of working capital and supply chain finance platforms that are capable of processing millions of individual transactions, among them Demica and Taulia, is also driving a shift in the way insurers operate.
“In the past, credit insurance was done at the portfolio level, which was good for insurers because it provided diversification,” says Casterman. “However, the market is evolving as SME financing platforms emerge, and they are operating at the transaction level in a very automated way on the basis of APIs: you send that transaction, you get an immediate response, or as fast as possible. Credit insurers have to be ready to work on this basis.”
“If the whole process is automated and close to real time, then the service provision of those credit insurers has to be real time as well,” he adds.
By embedding themselves into third-party platforms, leveraging data to analyse risks in different ways, and using technology to speed up back-office processes and better work with brokers, banks and clients alike, tech-forward insurers are starting to drive a new model of trade insurance. But connecting multiple initiatives to ensure the whole market benefits will require more joined-up thinking, and the question remains whether the industry has the ability to collaborate to make this happen.