Recent start-ups in Dubai illustrate the growing credit and political risk focus on the Mena region, writes Kevin Godier.
International headlines covering the Mena region continue to be dominated by political violence, as shown by the terrorist killing of some 20 tourists in Tunis on March 18. But economic activity in the region is gaining strength, according to French credit insurer Coface, which expected the Mena region to grow its GDP by 2.6% in 2014 and 3.2% in 2015, albeit well below the 2000-2010 average of 5.4%.
Coface is understandably downbeat over strife-torn Iraq and Libya, which it expected to contract by 2.5% and 19.8% respectively in 2014. Oil importers in the Mena zone have also endured a tough time until the reversal of high oil prices beginning in mid-2014, but are “making some progress in terms of structural reforms to improve fiscal performance, labour market conditions and business environment”, says Seltem Iyigun, Coface economist for the Mena region.
However, because most of the GCC’s oil-exporting countries have escaped the worst of the region’s geopolitical tensions, and are investing in non-oil sectors to transform their economies, “Coface assessments of business environment are better in these countries”, Iyigun stresses.
The uncertainty that permeates much of the overall Mena region is nonetheless triggering “a growing use of risk mitigation products, for both political and credit risk”, says Thomas Holmes, political risk and trade credit broking specialist at Miller Insurance Services. “It can be a testing and volatile environment, where a handful of governments no longer really function, and so the rising numbers of incoming European companies who already use the product want their underwriters’ expertise available in the new environment.”
In this regard, mention of the Islamic State (IS) jihadist grouping is inevitable. “Although the sustainability of IS is questionable, territorial gains across Syria and Iraq and the threat of gains in Lebanon and Jordan are making the placement of risks in the region more challenging in an area that already had limited appetite from insurers,” says Crispin Hodges, senior executive officer, Underwriter Political & Contingency Group, at Beazley Middle East Limited, which recently opened a Dubai International Financial Centre (DIFC) office to underwrite political and credit risks.
He continues: “The rise of IS has not yet, to our knowledge, created losses in the market. Its rapid progress, and acquisition of sophisticated weaponry from fleeing Iraqi forces have certainly focused the mind of underwriters. The very real risk for businesses operating in-country is that some of the social tensions will eventually find an outlet through outbreaks of civil disobedience, strikes, demonstrations or terrorist attacks that could result in business interruption or physical damage to assets.”
A particularly encouraging trend for the trade credit insurance (TCI) community is that “there has not been a single event that has led to high claims increases” in the Mena region, notes Rob Nijhout, executive director of the International Credit Insurance & Surety Association (ICISA), whose members account for most of the world’s TCI business. He reports that TCI usage is “growing rapidly in the region in line with increased trade flows”, pointing to an estimated TCI premium income of US$60mn across Mena countries, whose dominant export market is Asia. Claims have also been rising, both in size and frequency “leading to a somewhat harder market in parts”, he says.
ICISA members Atradius, Coface and Euler Hermes, as well as the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) account for “around 85%” of the TCI market share across the Mena region, says Nijhout. Other ICISA credit insurance members active in the area are Clal, Credimundi, ICIC and QBE.
Nijhout sees a “positive” outlook for these companies. “Reinsurance capacity is ample, premium income, insured turnover and the number of policies are increasing and demand continues to rise, fed by an increase in insolvencies in the region.” He believes this scenario could improve further if certain concerns are addressed in the region. “Financial information is often still unreliable and lacks adequate legitimacy. The legal framework is not transparent and in some countries insufficient. What hampers traders in many parts is a lack of an adequate insolvency regime.”
For TCI underwriters, a key attraction is that “there are many prospective segments of the Mena region where TCI solutions are under-utilised”, says Leroy Almeida, who heads the DIFC office established in late 2014 by Markel International. “A significant portion of the region is yet to understand the mechanics and the benefits that TCI offers. We spend a substantial amount of time and efforts in building awareness and educating various sections of the market.”
At Euler Hermes, Mahan Bolourchi, chief executive, GCC countries, believes that “TCI will be much more in the focus of the local and international banks for SME and multinational receivables, especially due to the Basel III requirements”. Bolourchi lists some other major drivers that fuel the growing trend for trade credit insurance in Mena, including “an increased sensitiveness by CFOs regarding trade credit risk; sustained economic diversification from oil towards trade export in the six GCC countries; cost-effective services offered by the credit insurance industry; and increased customer care activities put in place by insurers.”
Nijhout observes that the growth of TCI is boosted by underwriters operating in the region that invest in marketing campaigns and engage with trade sector groups and corporates. “A growing number of specialist brokers in the region are a welcome development in making TCI better understood. Penetration levels are still low and there remains a lot of room for growth,” he says. Underwriting tie-ups are another business expansion tool, believes Hani Salem Sonbol, ICIEC’s acting chief executive. “Our partnerships with entities like Coface and Credimundi are leading to an increased demand for our short-term trade credit business,” he states.
Bolourchi reports that the GCC credit insurance market continues to witness rapid growth, with record premiums being booked each year. “Since 2007, when Euler Hermes started offering TCI solutions and products in the Middle East, we have witnessed double-digit growth each year. We currently have about 50% of market share in the region in terms of business volume.” He points to “continued demand for our short-term credit and products like excess of loss”. Bolourchi emphasises that classic TCI covering up to 180 days of B2B transactions will be the company focus for 2015, after which new products suited to the region will be unveiled in 2016 and 2017.
Specifically, Euler Hermes envisages some of the most rapid growth coming from the UAE and Saudi Arabia, says Bolourchi. “Our primary focus is on the infrastructure and re-export sectors of the UAE, particularly Dubai and Jeddah. We also see potential in the industrial sector in Dammam, for example, where our focus is on petrochemicals or polymer manufacturing, as well as trading in the fast moving consumer goods and the food sectors. We also see the penetration of IT products growing, with most international vendors from Asia Pacific, US and Europe engaged in this market.”
Markel is hoping to write additional volumes of new Mena business in Dubai through a specialist underwriting platform opened in the DIFC by Lloyd’s of London. “We can write insurance and reinsurance business through our fronting partners on company paper and through the Lloyd’s Dubai platform,” says Almeida. “Having our presence on the ground means we can offer a wide array of products that consist of bespoke and structured trade credit solutions designed for banks, for capital relief purposes, obligor and counterparty risk mitigation. For corporate clients we offer singlebuyer, named buyer and excess of loss solutions.”
Dubai’s role as a business and trading hub offers a strong Mena foothold, according to William Stovin, president of Markel International. “Not only do you have a strong and established presence of the major international brokers, there is also a vibrant local broking community, which may well have access to clients with a different set of profiles to those looked after by the big brokers,” he emphasises.
Almeida highlights that around 75% of Markel’s premium revenues come from the UAE itself, followed by Saudi Arabia. “With competition intensifying in the region and business confidence steadily increasing, especially in the GCC, businesses looking for growth are feeling the need to trade more on open account terms rather than the traditional methods of secured terms,” he explains.
Political risk concerns
For providers of political risk insurance (PRI), the volatility across large Mena areas is acting as a form of marketing tool. “Regional geopolitical trends themselves are all the incentive that corporates need to increase the use of ICIEC facilities,” says Sonbol. He adds that ICIEC is “definitely seeing a big uptick in demand” for PRI and sovereign non-payment risk cover.
“We have seen a strong increase in Jordan where concerns over IS have meant enquiries doubling in the year,” says Hodges. “In UAE likewise there is strong and rising interest – with demand being generated in response to changing levels of economic activity in response to the oil price decline. Our appetite here is up.”
Elsewhere, says Hodges, enquiries are growing in Oman, “possibly in response to concerns over succession risks”. In Qatar “there has also been an increase which we believe is due to a number of factors including economic diversification and rising infrastructure investment ahead of World Cup. Saudi Arabia has seen a slight rise in interest triggered by concerns over the now resolved succession, economic diversification and the impact of the oil price changes.”
Hodges underscores that the complexity of the environment has led to underwriting selectivity on political and credit risk acceptance. “Egypt has certainly tested the market although Beazley has growing appetite for Egyptian risks following the restoration of relative economic stability,” he notes. “However, appetite for Libya has plummeted due to the general state collapse. Other markets which remain difficult include northern Iraq, due to potential losses arising from forced abandonment due to IS’s advance across northern Iraq and also Syria and Iran, where sanctions make any business impossible.”
Arash Shahraini, EGFI’s risk and international co-operation director, reports a “very good demand” for Iraq, Syria, Sudan and UAE. In Iraq, “we are in the process of covering some big projects, some of which are based on project finance”. For certain projects guaranteed by the Kurdistan Regional Government (KRG) or its affiliates, “we have witnessed some delays in their payments, but we think that they can meet their commitments in the near future”, he says.
Holmes highlights that the risks in Iraq are such that “people have to consider some form of PRI”. Requests typically focus on comprehensive contractors plant cover, he says. “Elsewhere, the busiest traders will be dealing with Algeria and even Libya, in their own way, with a few offtaking cargoes here and there. And there will be some banks still operating because there are margins to be had. Safer transactions would not generally require PRI, but some insureds will use the product in Dubai, to manage their limits in cases where a counterparty is close to the limit ceiling.”
Looking ahead, many PRI practitioners are awaiting a final agreement between Iran and the P5+1 group on nuclear issues, and the possibility of a staggered reduction of sanctions that could begin to generate new business. In Iran itself, EGFI is seeing huge demand for cover on techno-engineering exports by Iranian contractors, says Shahraini. While boosting EGFI’s medium to long-term portfolio commitments, it leaves the Tehran-based agency “exposed to uncertainty risk in the region, in case of unavailability of reinsurance”, he cautions.
According to Sonbol, the ongoing oil price slump is the biggest cause of uncertainty for ICIEC underwriters at present. “Though many of the countries we work with have adequate budget surpluses to ride out an era of lower oil prices, it remains to be seen as to how robustly these economies are able to tackle this issue.”
Iranian insurer eyes credit insurance expansion
The Export Guarantee Fund of Iran (EGFI) is attempting to increase its short-term trade credit portfolio, which involved a penetration rate of just 2.7% among Iranian companies in 2013. “The fund is in the process of reviewing its marketing strategies, with the help of international consultants,” says Arash Shahraini. He tells GTR that “Iranian businesses are not well aware of the benefits of credit insurance”, attributing this to traditional Iranian export patterns, mainly trading with neighbouring countries and assuming risks on their own balance sheets. “We are in the process of negotiating with the government about making credit insurance obligatory for the exporters for a certain period of time, and with a limited premium rate,” he says.