After some difficult moments, trade credit insurers are due for a return to profitability in late 2010. David Banks looks at the key issues dominating the market.
When the economic crisis took hold and the rate of insolvencies soared, trade credit insurers started to worry. Faced with mounting claims from failed business deals, insurers warned their clients to avoid transactions that looked too risky and, where necessary, withdrew cover.
Although this was a legitimate part of their risk management service, trade credit insurers were nonetheless accused of pulling away the umbrella from their clients as soon as it started to rain.
The insurers’ defence was that harsh financial conditions had forced their hand. Continuing to offer cover as if they and their clients were still operating in a thriving economy would be irresponsible for all concerned. Things had to change.
Different times, new measures
So, in response to the fallout from the credit crunch, trade credit insurers had to adapt their approach, with some making a gradual transition, and others acting more swiftly in an effort to return to profitability. Prices have risen, contract terms have tightened, and the role of reinsurers has come into sharper focus.
Overall, the commercial trade credit insurance market is worth around E6bn ($8.2bn) in premium worldwide. At least 80% of market share is with the ‘big three’ – Euler Hermes, Coface and Atradius – which all depend heavily on reinsurers, to the tune of up to 50% of their business.
Now, with the worldwide economy slowly emerging out of recession, exactly how has the trade credit market adjusted? Which changes are for the best – and for the worst? Here, we’ve outlined the good, the bad and the arguably ugly realities of the trade credit insurance industry today.
Demand for primary trade credit insurance has increased over the past 12 months, owing to heightened business uncertainty. The service provided by credit insurers has also become more popular because it offers policyholders an advance warning of any rapidly escalating credit risks.
On the other hand, the amount of reinsurance bought has generally remained at a consistent level. Instead of purchasing higher buyer limits, insurers have instead chosen to reduce peak risk exposure levels.
Aon Benfield senior broker for credit and financial risks Nick Ayres explains: “Insurers’ efforts to improve the quality of portfolios has resulted in reduced overall exposures, so growth [in trade credit reinsurance] from the greater demand has been masked.”
Insurer Atradius is said to be typical of the market, reinsuring 50% of its business on a quota share basis.
2 New entrants
Reinsurers have a much more positive attitude towards trade credit reinsurance now compared with 12 months ago. Many have been willing to offer increased support, and some reinsurers have entered the market for the first time, attracted by increased pricing and returns.
Trade credit insurer Coface’s UK and Ireland managing director, Xavier Denecker, says there are opportunities for reinsurers with the right skill set.
“Those reinsurers entering the market now will be doing so with the worst of the crisis behind them,” he says.
Aon Benfield’s Ayres confirms that the appetite of reinsurers changed during the course of 2009, and many proportional programmes were over-placed for 2010.
The market’s big three insurers – Euler Hermes, Coface and Atradius – place all or part of their reinsurance business through brokers, whose role has become more important as insurers favour more diverse reinsurance panels.
While brokers are usually expected to obtain maximum capacity at the best price, their role over the past 18 months has focused more on managing reinsurer/client relationships. With this has come a greater degree of transparency, Ayres says.
“Reinsurers have required significantly more information and data on portfolios, and more understanding of underwriting measures, criteria and policies,” he explains.
4 Reassessing risks
In the past year, trade credit insurers have embarked on the most significant transformation of their trading practices, and more is yet to come. Clients can expect a deeper scrutiny
of their finances and that of their trading partners.
For example, from this month Coface will assess its clients according to one of 10 risk ratings. Denecker says that transparency is an important aspect of this initiative. “What’s new is that we want these ratings to be known by our policyholders and to become an instrument of dialogue,” he argues.
Meanwhile, Guy Carpenter says that insurers are more strict about credit limits, tending to cancel rather than reduce them. Average acceptance
levels on credit limits are about
55%-65% compared with 80%-90%