In March, Risk & Insurance®
Managing Editor Cyril Tuohy spoke with Joseph A. Ketzner, executive vice president and commercial director with trade-credit insurer Euler Hermes ACI about trends in the trade-credit marketplace.
Following the financial crisis, many trade-credit insurers pulled back, leaving some clients leery of doing business with trade-credit insurers, even as
the stiffer bank lending environment opens a new
window of opportunity for trade-credit insurers. Here is an edited transcript of the interview.
Much of the reason behind the leeriness on the part of the policyholders relates to the expectations that were set for the policyholders when they initiated their program. What these carriers do when the cycles are up or down is to lend support to the business priorities at those specific periods. Those priorities are naturally different at different times in the cycle.
In an up cycle, it's typically about setting higher sales goals, and one of the key benefits is to maximize our clients' opportunities to expand sales. When you go into a down cycle, those priorities revert to a loss-avoidance strategy; it's more about capital protection, cash-flow protection and earnings maintenance. There is more focus on the insurance aspect from the policyholder's perspective and how well the risk is managed through effective joint monitoring.
This recession, unlike the five previous ones I have been engaged in, is the deepest and most protracted I have experienced. It came on the heels of five or six years of robust sales and profit expansion of our clients, so the underlying leeriness you see now should be analyzed in the context of this contrast.
It's fairly simple to understand from a policyholder's perspective. The trade-credit underwriters had some challenging times over the past two years. This is our business, and those that would argue that we don't collectively assume risk lack a proper frame of reference. Over the past two years, the industry has paid out between $8 billion and $10 billion in claims to policyholders around the world. Obviously, we assumed the risk.
WHEN TO EXIT
Our efforts are directed toward determining when a risk is no longer insurable and provide guidance to the policyholders. When we exit a particular risk, there is some linkage with the economics of the carrier, but most of it has to do with the economy, the industry sector and the individual company we're asked to underwrite. The process is very fluid and dynamic. This provides an absolute and clear picture to the policyholder when a risk is no longer insurable.
Our job as trade-credit insurers is to demonstrate the economic advantages of the trade-credit program and how to unlock the value of our client's receivables, which will be enhanced by our products and services.
What is changing at this moment in the marketplace is that there's light at the end of the tunnel as opposed to (staring at) an oncoming train. Not long ago when we were peering down into the pit of the economic abyss, no one knew how deep this recession would go. Now, we're certainly better off than we were 15 months ago, and it's an opportunity to reopen lines of credit and begin the growth cycle.
That doesn't mean rates will go back down to where they were following five years of economic expansion and low default performance. As an industry, we were too aggressive before on the risk side and too aggressive on the rate side--it simply wasn't sustainable.
As we collectively emerge for the worst recession since WWII, product positioning goes from fear-based selling to sales-expansion-based selling. That's the nature of our industry.
The margin of error associated with marginal risk has now become a more acceptable risk as the broader economy stabilizes and heals.
Carriers will hold the line on pricing because their cost of capital has gone up. Additionally, the cost of reinsurance to credit insurers has gone up. All of this ties back to rate.
A HARD MARKET STILL
We are currently in a hard market in trade credit and are now in the midst of transitioning back to a normal market. The market was soft in 2006 and 2007, when rates hit an all-time low and risk acceptance was high. When those two things converged, you didn't need a big recession to tell you how loss ratio performance of the carrier's was going to play out.
Atradius, Coface and Euler Hermes ACI are monoline carries. They specialize in trade-credit insurance and associated services. So we're very cognizant of the reputational risk associated with any actions we take. Could we have communicated better with clients over the past year and a half? Yes, and you can be certain that each of us will focus on this aspect moving forward.
I think there was a lesson to be learned from this downturn about how to better engage and communicate with your customers. I tell my younger associates to learn something from this test. The lesson isn't that undesirable credits should be deemed good credits; instead, it is about how to communicate the difference effectively.
Euler Hermes did better than most; we saw the onset sooner and took precision actions, and the impact of the downturn on our policyholders and on us were therefore less severe. We have emerged with our capital, our ratings and our client's confidence intact. The mission to educate the market on the benefits and value of our services continues.
May 1, 2010
Copyright 2010© LRP Publications