SPECIAL REPORT: TRADE CREDIT RISKS
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SPECIAL
REPORT:
TRADE CREDIT
RISKS 42 Five years aer the crisis
The trade credit insurance market has not
fully recovered since the banking crisis, but
is making strides forward
44 New markets, new risks
As businesses venture into unknown
territories, they might find trade credit
insurance to be the support they need
This report is sponsored by AIG
www.strategic-risk-global.com [ OCTOBER 2013 ] StrategicRISK 41SPECIAL REPORT
TRADE CREDIT RISKS
Five years aer the crisis
The trade credit insurance market has had to rebuild its reputation in the aermath of the
banking crisis, so credit insurers are focusing their attention on product innovation
S INCE THE HEIGHT OF THE
financial crisis, capacity has
steadily returned to the trade credit
even today we’ve barely been able to
get them back – they look almost lost
to the industry,” says AIG head of UK
‘A lot of zombie
Unease about the creditworthiness
in some European countries (Greece
in particular) led to a deterioration of
insurance market and demand for trade credit William Clark. “In 2008, companies may be insurer credit limit underwriting in
these products has risen. But memo- the major credit insurers cut cover trading, but can never the eurozone markets last year,
ries of an extremely difficult market rather arbitrarily and that really has according to a survey of Marsh’s
remain. When claims increased, had a knock-on impact. Clients have pay down their debts’ trade credit insurance experts. The
some credit insurers cancelled poli- looked at the value of credit insurance Richard Talboys Willis decision by many European banks to
cies and retracted their involvement and sought something different, stop trade financing increased the
in many segments of the market. something more consistent.” risk of default among importers and
The credit insurance market is The drop in policyholders could amount of claims during the crisis exporters seeking trade credit cover.
different today from what it was also be because of other factors. years. Insurers paid out more than “Southern Europe is still under
before the crisis. “There’s lots of Mergers and acquisitions have shrunk $6bn of claims worldwide. As loss the gun as far as its prospects are
capacity and competitive pricing for the number of insureds, while some ratios recovered and competitive concerned, although there does seem
risks in most sectors,” says Willis companies may have gone out of forces returned, the need to innovate to be some better news coming out
Financial Solutions executive director business. Others, feeling the pinch, was obvious. Policyholders began to from southern Europe in terms of
Richard Talboys. “There is caution may have opted to take the risk on to demand non-cancellable cover. “AIG GDP expectations from 2014
about some sectors, however. You find their own balance sheet. has long been a proponent of non- onwards,” says Clark. “Europe is
some insurers show a lack of interest “I suspect the reason some policy- cancellable limits and this is now part seemingly set for recovery, but it is
or capacity in, say, consumer electron- holders left was because of capacity,” and parcel of almost every trade credit not going to be without bumps along
ics or retail or construction risks.” says Clark. “They saw capacity being insurance house,” says Clark. the way and it’s going to be a long
Premiums have recovered and are reduced and started to question the While the worst of the downturn is road to get to pre-2008 levels.”
back at £334m – the same level of premium being paid.” over, the European sovereign debt
GWP written by the market in 2007. The ABI statistics reveal the distri- crisis rumbles on and insurers have Out of the ashes
Claims have also reduced substan- bution of trade credit insurance, and it seen an uptick in notifications of over- Should the eurozone troubles esca-
tially, from nearly 22,000 at the is clear that the biggest drop in policy- due accounts in Europe, a potential late, Talboys thinks credit insurers
height of the crisis to nearly 11,000 in holders has come from SMEs (custom- precursor to claims. “There is a con- and policyholders will be better
2012, according to statistics from the ers with profits of up to £3m). Those cern, expressed more by the insurers, prepared than they were during the
ABI. However, the total number of with turnover of more than £100m, that there are a lot of potential failures financial crisis. It is clear that a differ-
policies was 10,550 in 2012, down meanwhile, increased their share, and out there – zombie companies that ent credit insurance market has
from 14,086 in 2008. account for 42% of the market today. may be trading profitably, but can emerged from the downturn – one
“As a consequence of the banking The statistics also tell another story. never pay down their enormous debts that is increasingly innovative and
crisis, the credit insurance market They show how trade credit insurance – which are paying the price of excess invests in getting close to the risk in
lost some 4,000 policyholders and markets absorbed a substantial leverage,” says Talboys. order to better underwrite it.
Banks drive demand
While the reasons for purchasing trade credit have “The amount of regulatory capital banks have to activities is finite and at a time when it is
not changed dramatically, there is a new impetus allocate has gone up under Basel III and they are difficult to raise additional capital.
for policyholders to take out credit insurance now looking to minimise that credit exposure “Banks are looking to insurance to provide
owing to more stringent regulation of the banking they have on their own balance sheets, so they’re some regulatory capital benefits for them, using
sector. Under Basel III, Europe’s new regulatory looking to insurers to partner with them for that.” the underwriters’ financial strength to derive
framework, banks’ capital requirements have risen While a bank may have a ceiling on how much the amount of capital being used to support
substantially. Trade credit insurance is a form of it can lend within a certain territory or to a trade finance transactions,” explains Ross.
contingent capital that allows banks to grow their specific counterparty, the purchase of trade “The margin is now nowhere near sufficient
asset-backed lending portfolios in this more credit allows it to extent its credit and go to give the bank the return on capital under
restrictive environment. beyond that cap. Basel III, so they either have to push up their
Trade finance is driving the biggest growth in This is helpful at a time when the amount of margin or work with insurers to help provide
demand for insurance, notes AIG’s Neil Ross. capital a bank can use to support its lending more efficient capital structures for the bank.”
42 StrategicRISK [ OCTOBER 2013 ] www.strategic-risk-global.com“The view from the industry is It’s recognising that there is a risk in won’t over-control you by telling you or four years than in the past 20
that the big three insurers are much your business and covering you for how much you can sell to which com- years. Part of that is because there is
better prepared if a crisis recurs catastrophe losses.” panies, provided you follow your own better technology now, which gives
because they were underwriting a lot “Some companies are conserva- credit procedures and conduct appro- you more capabilities to develop new
of risk pre-2008 based on fairly tive and want first dollar cover,” he priate due diligence.” products,” says Ross.
sketchy information, so they had too adds. “They don’t mind paying more “The more we encourage compa-
many risks on their books and, due to for their insurance, but if they have a nies to align their interest with the Long road ahead
over-competitive premiums rates, loss they want to claim. Other com- insurer, the better responses you will But despite bouncing back from the
not enough fat in their reserves to pay panies understand they can sustain a ultimately get, because the insurer downturn, credit insurers must not rest
significant losses,” he says. certain level of losses, but want to be can see that everyone is driving in the on their laurels, says Ross. “Market loss
The biggest shift since the financial covered for losses that would hurt same direction,” he adds. ratios have been relatively stable, but
crisis has been the introduction of their balance sheet. Post-crisis insur- “More companies see they need there is a lot of potential for risk volatil-
excess-of-loss products. Unlike tradi- ers are more likely to allow you to to start investing in their own credit ity: conflict in the Middle East and
tional whole turnover insurance, excess- focus on where a company perceives management capabilities, so are North Africa, southern European
of-loss products are non--cancellable. risk and where a company can be becoming more suitable for an countries still in recession and South-
They also require insureds to take on a hurt through financial trading risk.” excess-of-loss product,” says AIG East Asia slowing down,” he says.
certain level of risk, and responsibility The shift towards excess-of-loss Europe trade credit regional manager “As an industry we’ve got to
for risk mitigation, before the insurance products is affecting the market. The Neil Ross. “It has provided a more develop products and solutions to
will pay out. As the name implies, big three traditional whole turnover consistent underwriting approach attract more companies to buy credit
excess-of-loss products are designed for credit insurers – Euler Hermes, Atra- throughout the economic cycle, insurance. We have to look at new
claims above a certain expected level. dius and Coface – have begun to offer providing organisations with greater ways to broaden the appeal.” SR
“A traditional policy would be a a mix of cancellable and non-cancel- certainty from non-cancellable limits
whole turnover product where every lable limits. Last year, Euler Hermes – it doesn’t seem to be as volatile.
single customer on a debtor portfolio launched an excess-of-loss unit. There is a level of risk-sharing
is covered,” explains Marsh’s trade By investing in credit manage- between the policyholder and the
A view from Germany,
credit practice leader in Europe the ment, insureds can lower their underwriter. Clients find overall it the continental engine –
Middle East and Africa Tim Smith. premium spend by taking some “skin gives them greater coverage across what’s next?
“With excess-of-loss, a company in the game”, says Willis’s Talboys. “If the whole portfolio, although they
agrees to lose a certain amount of you’ve got a good industry-leading are taking a deductible.” For the German credit insurance
losses through bad debts, each year. credit management team and you’ve Innovation is one way insurers market, 2012 has been a mixed year,
That might just be frictional business taken a big chunk of risk, then you have been attracting customers back with slim growth on the premium
losses, and a catastrophe insurer will align your risk with an insurer that can into the credit insurance market. side (+2%) and an increased number
say, if that’s your normal level of effectively sit alongside you. It will “We’ve probably seen more of policies. However, the loss ratio
losses we will insure you above that. then pick up the catastrophes, but product innovation in the past three has doubled from 47.5% to more
than 80%, creating a strong impact
on the combined ratio, which moved
Sending a strong message up to 98% – aer 67.3% the previous
year. It is important to notice that the
AIG has just opened a strong message,” says option for sophisticated interference from an world’s largest trade credit market is
trade credit office in AIG Trade Credit’s companies. insurance company.” suffering from a declining premium
Germany, where the head in Frankfurt, He adds: “Executives German companies rate development and a number of
company already offers Christian F Vollbehr. who actively manage their have not fled from trade large domestic claims despite an
a wide range of other “We have to educate the trade receivables book credit insurance as recent overall fairly robust economy.
insurance products in proponents of traditional based on clear internal statistics indicate, but AIG head of trade credit in
the market. German credit insurance procedures and with a they are on the lookout Germany Christian F Vollbehr says:
“Setting up a trade that the excess-of-loss strong focus on the for alternatives since the ”Going forward, the underwriters
credit hub from scratch in underwriting philosophy bottom-line will broad culling of limits are expected to support growth and
the leading trade credit successfully deployed appreciate the freedom to by the traditional will become more flexible in terms
market in a mature by AIG in many other take their own credit limit underwriters has le of product developments and
environment sends a countries is a viable decision without a bitter taste. services provided.” »
www.strategic-risk-global.com [ OCTOBER 2013 ] StrategicRISK 43SPECIAL REPORT
TRADE CREDIT RISKS
SPONSORED WORD
Uncertainty has boosted New markets, new risks
case for trade credit cover
The difficult economic environment since the financial Credit insurers could provide comfort abroad
crisis started has touched most of the world. While there
has been a considerable impact on developed markets,
some developing markets are now beginning to experience
limitations on growth. Complex patterns have begun to
emerge, with businesses having to adapt to a different
O RGANISATIONS MOVING
into emerging markets often
lack insight into their new customer
how their customers are performing,
so trading could be risky.
“People buy trade credit to cover
post-crisis future. The massive capital flows into the BRIC base. By partnering with credit insur- their key and principal customers,”
economies, for example, have become outflows as capital ers they can get valuable support. says Smith. “Rather than going into a
has sought “safer” markets. Companies have sought to The macroeconomic shift from new market blind, they would use an
diversify the markets they trade in, spread and manage risk West to East is expected to shape insurer with experience trading there
and ensure that they have working capital to support. trade finance and demand for credit for support. Some companies use
Against this backdrop and despite some difficulties insurance over the coming years. trade credit insurance to vet potential
over the past few years, trade credit insurance is becoming “With traditional markets stagnating, new customers and establish which
an increasingly vital tool for companies. It helps give organisations have to extend further ones are low risk.”
confidence to push for growth – both in mature markets, into new territories,” says AIG Europe To provide this insight, credit
with corporate failures ever present, and developing trade credit regional manager Neil insurers have to get closer to the risk.
markets, where there is more uncertainty and less security. Ross. “These are markets they don’t With offices in emerging markets
Insurers such as AIG want to support business growth by know well, so they have to deal around the world, they meet and
providing solutions not only to help de-risk the balance with new buyers and compete by vet thousands of companies. This
sheet, but also facilitate access to capital and enable extending payment terms.” information is analysed to sort the
technology to enhance the monitoring and control of risk. Sixty-three per cent of respond- good risks from the bad.
To fully support businesses, insurance underwriters have ents to AIG’s International Trade “Insurers are investing in these
to provide consistency and ambition. Consistency comes Survey predicted their dependency markets and getting closer to compa-
from products clients can have confidence in (which is why on export would rise over the next nies that want to be supported for
AIG has long been an advocate of non-cancellable limits) five years. While Europe is still the trade credit,” says Smith. “As compa-
and a relationship with an empowered underwriter or UK’s main export market, it is fol- nies become more sophisticated in
progressive technology that binds the insured more closely lowed by Asia, China, the Middle emerging markets, they will need to
with the insurer. Insurers will be increasingly challenged East, Eurasia and North America. purchase credit insurance.”
by clients and brokers to provide price, risk coverage and Dealing with new customers is Insurers are also in a position to
insight in an environment that will need to add value at one of the biggest risks when trading gain new policyholders as South-
every step. Banks will also play a part in the evolution of in new markets and this is where South trade continues to grow.
trade credit insurance, as they come to terms with Basel III trade credit insurance comes in. “Many of these markets haven’t had
and their clients’ demands for investment capital. Closer “There are areas of the world that are trade credit insurance businesses
partnerships between insurers, banks and clients will help. more difficult to trade in,” says there for very long. These markets
If culture is about “how one feels” then ambitious clients Marsh’s trade credit practice leader are becoming far more significant in
should seek ambitious insurers. Insurers should seek to in Europe, the Middle East and world trade terms than they were 10
grow their portfolios – but not necessarily with the same Africa, Tim Smith. Many countries years ago and they will continue to
products or markets. The Middle East, South America, Asia do not have transparency rules that become more so,” says AIG head of
and Russia offer great opportunities for insurers to provide allow exporters to access details on UK trade credit William Clark. SR
support by helping businesses to share best practice in
credit management techniques. Also, there is a greater
need for insurers to promote and innovate to increase the
relevance of trade credit insurance to companies that have AIG’s International Trade Survey
either considered themselves too small for it, not been
aware of it or have not considered it relevant. Overseas demand for year have an export of 13% since last year.
With a constantly changing economic and corporate UK products is driving strategy, a significant Firms in the higher
environment, we can expect further evolution in the trade export growth, growth compared with turnover bands are
credit market to bring new opportunities for companies according to the 2013 previous years. more risk-averse than
with a growth agenda. survey results. Most Factors holding them smaller ones. Firms with
firms report that their back are a lack of turnover of £25m use
AIG has been underwriting trade credit and political risk international turnover experience, finance, or credit insurance. Those
insurance for over 40 years and has grew between 2012 and confidence in obtaining with turnover of
a dedicated and experienced team 2013, and over 50% of finance. Forty per cent £1m-£5m use advance
across EMEA and globally companies with a of respondents protect payments rather than
turnover above £1m a their credit risks, a fall other risk models.
44 StrategicRISK [ OCTOBER 2013 ] www.strategic-risk-global.comBringing certainty to tomorrow Looking for a credit insurer who’s there in difficult economic times as well as good ones? An insurer that helps you manage your exposure to credit risks as well as insuring them? Well, you’ve found one. Our Global Limits Manager uses live payment and agency data to help assess customer credit risks more accurately, provide greater risk transparency and reduce administration costs. And our trade credit insurance policies offer greater certainty by offering non cancellable credit limits - agreed by our underwriting team or fixed by Global Limits Manager. Whether you are selling into emerging markets or domestically, our Excess of Loss product can be tailored to meet your needs. If you’d like to know more, talk to your insurance broker or speak to a member of the AIG Trade Credit team. Visit www.AIG.com Insurance and services provided by member companies of American International Group, Inc. Coverage may not be available in all jurisdictions and is subject to actual policy language. For additional information, please visit our website at www.AIG.com. AIG Europe Limited is registered in England: company number 1486260. Registered address: The AIG Building, 58 Fenchurch Street, London, EC3M 4AB
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