GTR gathered a group of trade credit and political risk insurance experts to take the temperature of the industry in the Mena region and evaluate its potential for maturity.
- Leroy Almeida, senior executive officer and senior underwriter & head of trade credit, Middle East, Markel International
- HC Barke, president & CEO, Prudentia Insurance Brokers & Consultancy DMCC
- Maninder Bhandari, director, Derby Group (chair)
- Harry Doyne-Ditmas, manager, credit, political and security risk, JLT Specialty Limited, Middle East & Africa
- Anabelle Everard, political & contingency group, Beazley Middle East
- Crispin Hodges, senior executive officer, underwriter, political & contingency group, Beazley Middle East
- Jules Kappeler, chief executive officer, Euler Hermes GCC
- Rajesh Sethi, chief executive officer, Noor Takaful
- Harriet Smith, political risk insurance broker, BPL Global
Bhandari: We are always grateful for insurance. But what happens when the chips are down? In general, I would say insurance is great, but when it starts raining, it doesn’t work.
Hodges: I do not think that is the case. If you look at the most recent example in the structured credit and political risk market for losses, for the financial crisis of 2008 onwards, it is reported anecdotally in excess of US$2bn was paid in claims by the commercial market insurance players, which is a huge number for a specialist niche market. It’s not a catastrophe type marketplace in the same way as a Florida wind storm. This is an event that took place where the market responded well.
Barke: One of the key aspects is that we have the two schools of trade credit insurance offerings: the conventional offerings model and the new offerings model. The conventional model used by primarily the world’s three largest specialist trade credit insurers operating in this region, Euler Hermes, Atradius and Coface, offers three levels of service: credit intelligence, debt collection and claims payment. These three players have extensive data bases of over 200 million corporates globally and over 40,000 corporates in the GCC region, which are monitored on a regular basis. This credit intelligence information forms the most value-added offering, serving as guidance to determine the creditworthiness of counterparties, and credit insurance coverage limits are set for each respective debtor counterparty. Based on this credit intelligence information, if a client’s risk rating is not good, or it has financial difficulty or it has delayed payments, that’s an immediate barometer which gets reflected on the risk level appetites. And if a previously approved debtor counterparty credit rating deteriorates, any withdrawal or reduction in such credit limit is always done on a prospective basis, so all the trades which are undertaken up to that period are covered.
Now there is a new offering model with the non-cancellable or guaranteed credit limit covers. In this model, the insurer underwrites the policyholder and its credit management policies and procedures pertaining to its counterparty debtors/customers. For well-established corporates with sound credit policy and procedures, the insurers offer non-cancellable credit limits with high discretionary self-authorised credit limits providing a greater degree of flexibility in covering fuller debtor portfolios. Select buyers underwriting is done by the insurer based on a full level of information presented to the underwriter. The insurer-approved limits and discretionary credit limits meeting pre-agreed criteria are guaranteed for the entire policy period. Of course, there are exceptions, where if the shareholding structure of the client changes, or the client is insolvent or has defaulted in its payments to the policyholder, the limits get withdrawn. But there has been no unfair withdrawal of the cover.
Doyne-Ditmas: It can be very difficult for insureds to justify the purchase of the whole turnover credit insurance policies which function in most part as an outsourced risk function. When limits are being withdrawn by insurers, the insured is minded to do the same. Yet their customers, perhaps more than ever, need their financing lines in order to ensure that their trade flows are continuing, often through difficult trade cycles. Here, as the insured you’ve got that dichotomy between managing your risk and your commercial business relationships and that’s the gap that I think is being bridged in specific instances with the more structured new-school type of insurance: it ensures comprehensive non-payment cover and non-cancellable limits for the duration of the policy can be a real competitive advantage. There is a movement, particularly in the banking market, towards the use of the structured credit products, where premium is slightly increased, but the cover is more comprehensive and ensures consistency of financing lines, which better allows the bank to meet the demands of their clients.
Bhandari: Is takaful Islamic insurance the future? Is it better or the same as conventional insurance?
Sethi: I think there are different challenges for takaful. It’s not a full-strength insurance market as yet, so it’s still developing. The regulators are doing an admirable job, but it is a challenge to regulate conventional and takaful providers under the same guidelines because, in principle, they operate differently. And the difference is not only at the front end (sales explanations, shariah board requirements, etc), there are also constraints at the back end of the takaful business. There isn’t enough re-takaful capacity for operators to place risks away. Most takaful operators take approvals from their shariah boards to place some risk with conventional reinsurers. So for the moment, we should discuss the differences on a theoretical basis, because operating a pure takaful is still a challenge. On the investment side, takaful requirements are more easily met, but on the risk-taking and risk-placement side, most takafuls will probably operate as a hybrid until they grow to a sustainable size. I see the benefits in the theoretical concept of takaful, but the reality of the marketplace is that there’s a fair amount of reliance on the depth of the conventional market.
Barke: In the Middle East market, the two strongest ECAs are takaful-based: the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), and the Arab Investment & Export Credit Guarantee Corporation (Dhaman). Both play a very important role in increasing two-way trade flows between Arab member countries and the world by providing insurance protection to Arab exporters on one hand and on the other hand providing investment and trading insurance protection to overseas exporters providing goods and services to the Arab member countries. Working in close co-ordination and co-operation with government departments such as the ministry of finance and the central banks of participating member countries, both ECAs provide a robust and unique insurance and debt collection service protection to clients.
In a takaful arrangement, whilst the policy contract documentation complies with shariah, the risk hedging and ultimate protection is structured on conventional reinsurance basis. Lloyd’s of London plays a prominent role in providing reinsurance protection to these multilateral ECAs and takaful players. Euler Hermes is the first insurer to offer takaful credit offerings in the UAE market, both on conventional whole turnover as well as structured credit insurance offerings. We now have local insurers like Noor Takaful and Al Hilal Takaful offering takaful credit solutions backed by conventional reinsurers like Lloyd’s of London and Euler Hermes.
Bhandari: So from a customer’s perspective, are we suggesting that customers should generally look for those sort of insurance arrangements which are backed by institutions or shareholders who have access to the authorities?
Doyne-Ditmas: It is one tool in the toolbox. In terms of private debt obligations, ICIEC and Dhaman sit no better than perhaps the other private market reinsurers. It’s only when there is a state or sovereign obligation associated with an asset or loan that their preferred creditor status starts to have an effect from a risk perspective. In such instances we would certainly advocate the involvement of such insurers allowing our clients to benefit from the halo effect of Dhaman and ICIEC.
That said, in countries like Sudan and Egypt they can often come up trumps and can often act as a platform for the private market reinsurers to provide additional power and solution behind that, and that is an added bonus for both the client and the reinsurance market. So it could all pull in the same direction.
Hodges: From a private market insurer perspective, the benefit of the multilaterals in general is the clout they have at government level, meaning that what may be an unpalatable deal for the private market often becomes palatable. But that is on the basis that we would reinsure them, not co-insure. With reinsurance, we are behind them, we get all the benefit that they have at that government level without having to sit alongside them as a commercial entity. But the actual benefits is diminished by being co-insurance rather than reinsurance.
Almeida: In terms of the need for a takaful product, we have definitely seen that develop to some extent and some local demand. That said, I think a substantial portion is then going back to the conventional reinsurance sector. It’s basically just a front-end cover at this moment because the client is insisting on an Islamic, takaful-based product but reinsured with a non-takaful or conventional reinsurer. But what we want to see is the takaful product being developed end to end, which I don’t think is available as yet for trade credit and political risk. It may be there, for example, for life insurance and some other insurance and reinsurance classes, but when it comes to trade credit and political risk, it’s such a specialised class and still has a couple of years to go to develop a fully end-to-end takaful product.
Doyne-Ditmas: It’s one thing to have the wording, takaful or shariah-compliant, and another to have the actual capacity provided by the insurers shariah-compliant. I think Cobalt are the only political risk or political violence insurer that has the ability to do that. But essentially the argument was if you’ve got these large placements with many syndicates on them and you’ve just got one syndicate that’s shariah-compliant, how much of a benefit is that going to afford until there is a bit more capacity in the market in that regard?
Bhandari: Do you think the Middle East PRI and TCI markets are mature?
Kappeler: The market has clearly developed over the last years. Compared to many other markets, there is still potential. We at Euler Hermes are investing in the Middle Eastern market and recognise the potential.
Bhandari: What is missing?
Kappeler: A mature market has people who should be aware of the offering that our industry has to offer, both on the political risk insurance side or the standard or traditional credit insurance side, and clearly I see a way to go here, still. Also, how well accepted are our products to banks? We need to make our products more bankable, which gives more security not only to the bank but also to the insured. We have a way to go to further promote the products in the market and the benefits.
The sales cycle is totally different to what we are used to, for example, in European markets, where credit insurance is better known. Here, in the Middle East, the sales cycle takes much longer and starts at an earlier point, creating awareness around credit insurance and its added value.
Smith: We’ve got some specialist underwriters sitting around the table, I think that’s been lacking previously. Lloyd’s Dubai opening up has been a great platform to encourage the underwriters in with a trade credit and political risk specialism. The same applies for brokers. Getting product knowledge out to the market has been critical and is a critical role of us as brokers. That’s about generating the business.
Bhandari: Do you feel the market is not yet aware of the full suite of products available to them?
Smith: Yes, that is definitely my impression. In better-established banking industries, banks acknowledge that they can get capital relief from the product and that isn’t recognised here by everyone as yet. Once people have a better understanding of how the product would work under Basel II and III, they might start to see the benefits of it and that will in turn have a greater impact on maturing the market.
Bhandari: Why don’t I get the feeling that the offering in the Middle East is in line with international offerings?
Hodges: I spent time in Singapore and Paris before here, and when I first arrived here I thought that this market was effectively where Singapore was 10 years ago. I’ve subsequently over the last two years rejected that and I do not think that this is a mature market right now. It needs far more specialist brokers on the ground, which it has not got. It has taken two very specialist London brokers to send individuals over; that is still not critical mass.
I think the reason that we are seeing regional banks coming to the market, which by the way has only happened in the last 12 months, is because the oil price has collapsed and liquidity has collapsed and suddenly banks that were relaxed about telling insurers and brokers they are not needed are now finding that actually they probably do need some sort of alternative risk distribution and syndication that isn’t just reliant on a huge wash of liquidity sitting on their balance sheet.
The role of the broker is key: placement normally requires syndication beyond one insurer. I quite often have non-specialist brokers coming to me saying: ‘We need a limit of US$30mn and Markel has an appetite of US$10mn, and Beazley has an appetite of US$10mn: where are we going to get the other US$10mn?’ And then we are expected to go and do the broking to another panel of insurers, because they are not specialists. But effectively, all that is doing is making us the hybrid of the insurer and the broker because there aren’t enough of these specialists on the ground to do that job.
When one of the specialist brokers gets an enquiry, you never have that issue, because they’re specialists in their field, they actually know how to syndicate a placement, they know who to go to for lead terms, who to go to for follow terms. But I think from that perspective, it is this room and maybe one or two other specialists on the ground. Even with some of the bigger brokers, there are some sizeable brokers who one would expect to have expertise in the field in the region but they are totally unrepresented. Or they have got someone who’s doing a line of business that isn’t actually structured credit and political risk but may have some sort of financial element to it like D&O,
and then that person will be pulled in to do this.
This is a very niche product area and when claims come in, they require expertise.
Smith: In the past there’s been a history here of a product being taken off the shelf and handed to the insured, and telling them: ‘That’ll work for your risk.’ And when it comes down the line and there’s a claim, it hasn’t worked, and then the insured asks why? It doesn’t give the market a good name. If you have a specialist broker there to take you through that, you will avoid those pitfalls and the product will work.
Bhandari: I hear some clients saying that they have to go to multiple brokers for multiple needs. Why is it that the providers, whether they are brokers or insurance companies, are very product-centric rather than customer-centric? This is an argument between specialisation and generalisation and how you marry the two for the comfort of the client. At the end of the day, they’re the ones paying the bills.
Almeida: To put into perspective, it’s like asking a cardiologist or a neurosurgeon to fix a broken leg. You can’t. Because insurance is such a vast area, each class of insurance needs a specialist advisor, broker, by itself. What you spoke about, going into a digital era where you standardise wordings, standardise proposal forms and things like that which can be accessible to all. Again, that’s still in the future and much work needs to be done. But it’s still not going to be a one-size-fits-all solution in terms of insurance because it is very specialised. It’s an indemnity product with a lot of terms and conditions and needs advice from a specialist insurance broker.
But to answer your question, it’s hard to basically have a single broker or a single proposal form address all of the insurance needs.
Kappeler: From my side, I represent Euler Hermes, part of the Allianz group, and what we see clearly is a twofold development: one, it’s more standardised products for the SME market, very easy to handle. On the other hand, for large corporates and specific demand, we see tailor-made solutions customised to fit the needs of each individual customer.
Bhandari: In your opinion, which way is the insurance industry around this region going to move, and what sort of developments should occur to bring it in the shorter term to maturity?
Hodges: We have not mentioned this, but a big part of what we do as insurers is underwrite our insured. The deal is the deal. Frankly, we do not go into this as a one-off transaction and expect never to see that insured again, we expect this to be the start of a long and healthy relationship. If you look back in the past, the Asia crisis in 1997 and then if you look at the financial crisis of 2008 onwards, the market has done a lot of soul-searching about a lot of the claims we had, and some of them were just straight, plain claims that happened because the world was going through a huge financial crisis. There were also a lot of claims which were about the fact that we didn’t know our insureds well enough. We didn’t know the people, how they transacted, how they behaved.
What I see here is that people want it as cheap as possible, and if I’m US$1,000 cheaper than Leroy is today, they’ll go with me this year. Next year, if he’s US$1,000 cheaper than me, they’ll go with him. The continuity that we see from the client base in Asia, Europe and the US does not really occur here. That loyalty, that sense of building up a relationship, it’s miles away at the moment. It’s not really there. The one thing that I would say that is very good is that this is a very small market, which means that when you want to see decision makers, they will see you straight away. Brokers here are very sensible from the point of view that if you get the insurers in front of the clients, it gets the insurer generally more comfortable. So I think that the fact that this is a small, nascent marketplace does mean that we have a greater access to that level of client base that we wouldn’t necessarily have elsewhere.
Doyne-Ditmas: I think that was quite damning of where the market is. I think it is changing very quickly, even within a period of a year and a half, the market has changed quite drastically. In my view, insureds have a better appreciation of continuity of cover and not just price. Certainly the benefits of using a broker are being better understood, and I think it’s a matter of time before things tick up in the right direction.
Sethi: I think a lot of work needs to be done, especially given the small and mid-size corporates here. Although certain projects do need very specialised help and advice, a broader swath of the market is in standardised products, and meeting their demands will get to some sort of maturity.
Smith: I think prior to engagement from the central bank on these products, which Harry’s already touched on, greater transparency from everyone, and more specialism is required.
Hodges: Prior to any of that occurring, we need to see some regional stability. Everyone refers to the UAE as the Switzerland of the Middle East, hence why Jules probably just moved from Switzerland to the Middle East. The difference is that sitting in the cantons of Switzerland one is not surrounded by Syria, Libya, Iraq, Iran, Saudi, all of which are going through a huge state of flux whether it be civil war, proxy war or political and fiscal upheaval. Whatever it may be, it has a direct impact on the economies of the region. From my point of view, there needs to be some stability regardless of where the oil price is going.
I think currently we are sitting in a bubble, but around the bubble Rome is burning, and I think that needs to sort itself out before we start worrying about insolvency law.
Barke: Three key points going forward. The first is the demand for credit insurance would be more driven from a finance perspective compared to a pure risk perspective. The finance perspective is driven by two key factors: corporates wanting to monetise their trade receivables and/or optimise their supply chain financing; and trade finance banks seeking to credit-wrap the transactions and/or portfolio to enjoy capital relief treatment under Basel II compliance. Such credit-wrapped transactions in turn also promote securitisation and mobilise additional funding liquidity to such banks.
Second, you would see there would be a good level of syndicated transactions with the coming in of Lloyds of London. Capacities would be consolidated to meet up with client deal/transaction level expectations. This would improvise counterparty information availability and intelligence sharing, encouraging closer co-operation between corporates, banking fraternity and specialised trade credit insurers.
And finally, the fintech revolutionary drive to digitalise the transactions, which is creating waves in the matured financial markets of the US, UK and Europe, would also enter this emerging market of Middle East and Africa in the near future, paving the way for innovative trade financing structures.
Kappeler: What is in the interest of all of us is that we need to do a good job and keep our promises: and that does not start with the claims payment, it starts much earlier after we tell the client what is possible and what is not. Then we need to make sure that it’s not just about risk transfer; it should be about offering solutions rather than products. I see a lot of opportunities, for example, with digitalisation, connecting customers’ systems, like the ERP system of the insured to our systems. And then it is about making our products bankable to support our customers’ banking needs and ensure their liquidity.
Almeida: In terms of risk appetite and capacity coming to the market, that is dependent on various factors, one of them being confidence and geopolitical stability in the region. The other thing as far as building up the credit insurance market from a futuristic point of view, I think the UAE as a model has definitely been ahead in terms of the region. If this model can be then be implemented across other countries, I think the concept and the product benefits as a credit risk mitigation tool and trade enabler, whether it be specialised or the whole turnover structure, has tremendous potential.
Bhandari: Thank you ladies and gentlemen for your perspective on the insurance market and your valuable insights.