Jane Johnson, director of Special Products for Northern Europe and Asia Pacific at Atradius, looks at the changing face of international trade and some of the resulting challenges for the insurance industry.


The world is changing. The persistent eurozone malaise serves to make it clear that economic growth, trade and investment has undergone a seismic shift.

The credit and political risk market is responding to these fundamental shifts. The relatively new specialist market in Singapore is evidence of the commitment of underwriters and brokers to expand their traditional footprint and find new opportunities in the Asia Pacific region. This market now has approximately 20 underwriters and sufficient capacity to support transactions of any size.

The mono-line credit insurers Atradius, Coface and Euler Hermes have made substantial investments over the last decade in developing a direct presence in many emerging markets, or alternatively forming fronting partnerships where this is the best initial route to the market. This investment continues as the demand from multinational and local business continues to grow.

Expansion into new markets poses a number of regulatory and practical challenges for insurers. Nigel Brook, partner at Clyde and Co, an international law firm that advises insurers on regulatory and licensing issues, comments: “Some of the countries with the highest growth are the ones with the toughest insurance regulations as well. India, China and Brazil all have very tight regulations against non-admitted insurers.”

These regulations can create frustration for both underwriters and insureds where the requirements of a credit or political risk policy simply cannot be met by the local market and yet a suitable policy cannot be placed with an underwriter that is not locally regulated. The good intentions of regulation, to ensure a reliable and stable local market in the interests of the insured, may in some cases be working against those very interests by denying access to much-needed cover.

Provided the parent company is located in a country where underwriters have a license to issue insurance, it is usually possible to structure coverage based on the financial interest of the shareholder. Brook explains: “Financial interest cover gives cover to the parent for losses incurred as a result of a losses made by a subsidiary. These losses affect the balance sheet of the parent as the subsidiary is not as valuable as it used to be before the loss was suffered. The impact on the parent’s balance sheet is deemed to be equal to the value of the local loss.”

Claims under this structure are paid to the parent and the policy will explicitly state that the subsidiary is not insured. If the structure is carefully implemented, local regulation is not engaged. The financial interest structure is useful, but has limitations. Complex company structures may create a long chain between the parent and the ultimate subsidiary. There is an increasing trend for limits to be placed on the percentage of foreign ownership that is permitted. Both these situations present challenges to obtaining the full coverage needed for a risk. Although the structure is useful for multinationals with parents in the developed insurance markets, it does not address the need of the increasing number of international companies where the parent is located in less-developed insurance markets. Local companies remain cut off from the specialism that is not yet available to them.

Regulation is an important tool in developing a local insurance market and protecting it from international competition. Although this objective is understandable as a matter of strategy, it may not be of benefit to the potential insured in the short to medium-term as the market develops at a gradual pace. Financial considerations – as much as policy issues – determine the strictness of regulation and there is increasing co-operation between insurance regulators and tax authorities. Local insurance companies are an important source of tax revenue both from corporation tax and through generation of local
insurance premium tax.

Even where non-admitted policies are a possibility, tax on the insurance premium may be payable by the insured. Brook explains: “More and more countries are saying, if you have the benefit of insurance, even if you did not arrange it yourself, you are in our territory, so you must pay our tax. In the financial downturn it’s a nice, easy source of revenue for countries.”

There is increasing awareness of the impact insurance regulation has on policy issuance for both the insurer and the insured.

However, some misunderstandings still exist, particularly in the area of issuing cover that benefits a subsidiary even if the policy is not directly issued to them but to the parent “for and on behalf of”.

Brook adds: “That formula does not work and it could hurt both the insurer and the insured by putting them in breach of local law in places where there is no tolerance of non-admitted insurance.” In most jurisdictions the issuance of the policy is the offence rather than the payment of a claim. It is unwise to hope that the problem of how to deal with the transfer of a potentially large sum of money under an illegal contract will never arise.

As brokers and insurers look further afield to capture the opportunities presented by developing markets, there are more hurdles than regulation alone. Direct or fronted policies will inevitably require that the policy is issued subject to local law. There will most likely be none of the experience and precedent available from the long experience of insurance law in our traditional markets.

How should underwriters respond to the demand for political risk cover on what are now domestic insurance policies? Most importantly there is the cultural difference that affects every aspect of our activity. Do we have the same expectations, beliefs and concept of what constitutes an agreement? Not as yet.

But as the market stretches to embrace new horizons, we will learn a great deal and inevitably experience successes.