The private sector trade credit insurance (TCI) market appears to be blossoming again after its travails of 2008/09, writes Kevin Godier.
The major TCI underwriters endured heavy criticism for their withdrawal of credit lines and lack of transparency during the height of the 2008/09 financial crisis, triggering a change of approach and a widening of product lines.
Particularly positive about the current market direction is Marc Henstridge, director of risk, Atradius UK and Ireland, who argues that “the fact that trade credit insurance continues to endure after almost a century and is increasing in both profile and popularity is testimony to the fact that it is more relevant than ever”.
Generally speaking, says Henstridge, the TCI market has experienced further stabilisation in the past 12 months. “In the UK, we’ve seen a raft of new competitors with differing product offerings. The industry as a whole is seeing a lot of positive activity: expanding and attracting investment, trust, plus new customers aware of the risk climate. It will be interesting to see how things evolve once countries such as China become interested in developing international offerings.”
In concurrence is Mike Holley, chief executive officer of Equinox Global. “Overall I think the market is developing very nicely, as alternative providers such as AIG, Ace, Markel and ourselves are all growing their books via clients that would not have bought TCI in its traditional format. We see the different choices and flavours such as our highly-tailored, non-cancellable product bringing a greater vibrancy that will continue. While the biggest players will see their core markets in Europe as saturated, we feel that we have barely started,” he says.
Similarly, Ewa Rose, divisional managing director, trade credit, Markel International, sees demand for cover improving. “Our sector tends to be more driven by positives, such as client growth, which acts as a general trigger to take on credit insurance. 2013 seems to be looking more positive than 2012 in terms of excess of loss (XoL) and multi-buyer solutions,” she notes.
Rose highlights a conjuncture of “rising competition, as more capital enters our world, alongside a rising willingness to co-insure, whereby the Lloyd’s of London model is starting to become accepted elsewhere in Europe”. In the US, the exposures are so large that co-insurance is a factor. Asia is also developing along those lines, she observes.
Illustrating the competitive paradigm at work, both Rose and Holley point to the launch by Euler Hermes of an XoL policy as exemplifying the spread of new product lines.
Emerging markets targets
A key trend seen by one of the newer market entrants, Swiss Re Corporate Solutions, is an expansion of credit insurance into less mature markets, where the key challenges include a deficient regulatory environment, poor quality of information and less skilled underwriters, according to Azman Noorani, surety head and director at Swiss Re Corporate Solutions. “As trade between emerging market regions such as Asia and Africa expands, it is expected that these markets will be very soon be bigger than the old established east-to-west trade routes. But expansion and penetration into these markets is not easy,” he cautions.
Firstly, the quality of information is poor, Noorani stresses, citing “language issues, information availability, and not being on the ground to kick the tires”. The advent of new, young markets also brings the problem of a lot of new inexperienced underwriters, who may not be able to explain the product property or fully understand the clients’ needs, he notes. Noorani adds that credit insurers are “increasingly requested to adjust their wording, warranties and conditions in policies” to cater to regulators or simple market demands.
“By contrast, our emphasis has always been and will continue to be the quality of underwriting,” he states. He argues that regulators in many countries are either not prepared or are too strict. “In India, for example, TCI cannot be issued to banks, financiers and lenders. In most countries in Asia, TCI must be done through a local partner, although it has to be said that Singapore is rather liberal and very positive. It is now the second-largest TCI market in the world behind London.”
Emerging markets are nonetheless a huge opportunity, believes Hugo Carson, trade credit manager at AIG Brazil. “Companies and financial institutions are becoming more aware of the different manners of utilising the product as a risk mitigation tool. We expect that markets will continue to grow, especially in countries such as Brazil where the level of product penetration is still low, compared to Europe and North America. The non-cancellable coverage we have been providing for over 30 years in other markets has assisted us in meeting the needs of sophisticated clients in Latin America, who up to three years ago did not have the option available to them locally,” he says.
Pricing and risk disparities
According to Lindley Franklin, chief executive of long-established US-based insurer FCIA, a key theme that should preoccupy all TCI players is the contrast between current pricing and risk, and its potential to reactivate past industry mistakes.
He explains: “The global meltdown resulted in large claim payments by insurers several years ago. However, since that time, credit insurer loss experience has been very good. This good loss experience combined with a regulatory incentive for insurance companies to diversify their books into specialty lines, has brought more capacity into our line. The increased capacity has put pressure on market pricing, especially on higher premium opportunities. While lower pricing is not a problem if credit risk is decreasing as well, it is a big concern if risk is increasing or remains high.”
Even though credit losses “continue to be within reason at the moment, and loss experience reported by credit insurers supports lower pricing”, the global environment is unstable to the extent that the next high claims period could be just around the corner, Franklin contends.
He cites a credit bubble building, as investors reach for yield, meaning highly-indebted companies are not only able to refinance their debt without concern, but are doing so at record low interest rates. “But this could all change quickly if there is a shock, which could happen in Europe, which remains mired in recession, the US, where the economy is vulnerable to the upcoming reduction of government spending, and China, where growth seems to be faltering,” he warns.
One factor that will bring greater focus to the risk-to-reward equation is the European Union’s (EU) Solvency II directive, says Henstridge at Atradius. “It is having little impact today as the compliance date has been rolled forward. However, Atradius is continuing in its plans for early compliance and the UK is leading the way in this.”
Noorani at Swiss Re Corporate Solutions comments that the impact of Solvency II – which codifies and harmonises EU insurance regulation – is still difficult to ascertain. “Banks have taken steps to ensure that their regulatory capital already satisfies the requirements. But insurers would need to adjust their wordings on warranties, especially conditions if they are to ensure continued acceptability by the banks. The irony is that insurers need to weaken their wordings to adjust to the regulatory requirements,” he says.
“In terms of new multi-line players coming in, we have seen two more syndicates in the last couple of weeks, and people are moving around in our market,” says Equinox Global’s Holley. “You would have to conclude that Solvency II isn’t stopping new insurance companies, because there is also no sign that monoline companies are being affected.”
Franklin at FCIA underscores that the implementation of Solvency II “is still a few years down the road and does not yet appear to be having a significant impact on our market”. However he says that the Basel III protocol – which requires banks to allocate higher levels of capital to trade finance transactions – is already being implemented by financial institutions and “therefore provides a great opportunity for credit risk mitigation products that provide capital relief”.
He continues: “Our experience is that banks have different positions on whether credit insurance coverage provides this relief. Some seem to simply view credit insurance as a conditional product that by definition doesn’t provide capital relief. However, others believe that as long as the conditionality of the insurance policy is within the operational control of the bank, the policy provides capital relief under Basel III. This perspective has encouraged brokers and insurers to create policy wordings that are ‘Basel III-compliant’ and these policy forms are being actively issued by insurers today.”
According to Carson at AIG, banks are becoming more creative in order to comply with the regulatory environment, and utilising credit insurance as a tool to do so. Banks that have never used the product as a tool are now in the process of internally approving it through their compliance and respective legal departments, he affirms.
ECA overlap minimal, report TCI players
In the light of the private trade credit insurance (TCI) market’s global inroads, GTR enquired whether underwriters are increasingly running into competition from the official export credit agency (ECA) community.
“There is some ECA overlap, and some moaning in the private market about this, but I don’t have a strong view because the ECAs offer something different from us,” says Mike Holley of Equinox Global. “They can offer capacity but not the same level of service. If we want to compete and win, we usually can through service provision, so they are not a threat.”
At Markel International, Ewa Rose agrees that private sector exposure to ECAs is limited. “We do see a little of them as we have started writing contract frustration, over the medium term,” she says.
Marc Henstridge at Atradius UK & Ireland believes that the playing field is clearly marked. “While the private sector remains able to offer credit limits and exposure to businesses, there is no need for ECAs to step in, except in the exceptional circumstance that cover to fill the gap is unavailable from any other source. It would be hard for a national ECA to replicate the breadth of international knowledge and skill of an established insurer with offices in hundreds of locations globally.
Another challenge is that each ECA carries the rating of their respective countries, which can make multinational trade very complex for many organisations,” he comments.
A distinct dividing line is also seen by Hugo Carson at AIG Brazil. “ECAs play a big role in securing sales through TCI around the world, especially for companies who have little to no experience in exporting, or have only a small portion of their sales linked to exports. As sales and international experience grow, the tendency is for companies begin looking at private insurers as an option, as pricing tends to be more flexible in the private market, after a certain amount of volume in sales is reached,” he says.
The US market is worth watching, notes Lindley Franklin, FCIA’s chief executive. “US Exim has done a good job of not competing with the private sector up until now.” However with the White House pushing hard for export growth, the Washington-based agency is under pressure to expand its support to exporters. “We will be watching closely to see if US Exim begins to compete for business that is well-served by the private sector,” he states.