Editor's note: The answers that follow were collected from separate interviews with Brian Squibb, managing director of Aon Trade Credit; Evan Freely, senior vice president, Global Markets Financial Solutions, Willis of New York Inc.; and Dan Riordan, executive vice president and managing director of Zurich Emerging Markets Solutions, an underwriter of medium-term trade credit.
Question: There have been several new entrants into the trade-credit marketplace. What has that done for pricing?
Freely: It really hasn't affected it too much. It's still a fairly hard market for this kind of coverage. There are not a lot of alternatives. It just gives you a better chance of getting approval. And because the banks are driving the market, underwriters tend to take a percentage of the bank's margins or spread, so it really hasn't affected the price too much. I'd say you really just have a better chance of getting approval now.
Squibb: What we have seen on the trade-credit side (since 1997) is tremendous growth. The industry guesstimate is that the U.S. business is growing at about 18 percent, and that is not rates or premium rates. That is new buyers and new buyers for an insurance product. All major corporates, midsize and small to midsize enterprises are beginning to recognize that the receivable is a key component to the company's success, and that's been the push for the growth.
Couple that with Sarbanes-Oxley and assurances that these companies are having to deliver to their shareholders, that there will be no hiccups on the balance sheet at the end of the year and that the financial condition of the company will remain solid. There is much more focus now on saying, "How much do I provide for bad debts? Am I overproviding for bad debts? Do I have concentrations of credit limits?" It's been a consistent feature for about eight years now, and each year this market gets bigger and bigger from a very small base.
The good news for us is that outside of public-agency providers like the Export-Import Bank, the market has grown. Competitors include FCIA, Exporters Insurance Co. and a number of large political-risk insurers, but most focus on the short term. Another one is Unistrat, and we also see ACE in the business. It is growing because of the need for new products and innovations.
Q: It sounds like credit-risk insurance is easier to get, though perhaps not necessarily cheaper, than it was five years ago?
Absolutely. Five years ago, there were only a few alternatives, so that's true. It was mainly driven by the Export-Import Bank and other export credit agencies until about five or seven years ago. Our experience is that medium-term credit has been a better market for underwriters in that there haven't been a lot of losses in that space compared with short-term credit (less than one year). There have been more losses in short-term cover. That's because the underwriters are more conservative on the medium-term cover and it's driven more by size and political risk than it is by creditworthiness. The short-term credit markets tend to get burned by the surprise bankruptcies more often.
Q: Are you developing new products, or have you found the market more responsive to tweaking existing products?
There have been a lot of changes going on in that area. There are about a dozen carriers in this market. A number of them are monolines. They'll only write one class of business, and the one class of business in this case is trade credit. Euler Hermes, Atradius and Coface are examples of monolines. All three are European, all three have been operating here effectively for the last seven or eight years, and what they are doing is adjusting themselves to a U.S. market.
Underwriters are getting a lot better at understanding what corporations in the United States want. Corporations want to remove some domestic risk, but they want to sell more products into politically sensitive regions. So it's possible now for a corporation in the United States to say, "Let's have a sprinkling of cover. I want to cover some of my domestic receivables, but not all of them. I want cover for some of my export receivables, but not necessarily all of them. And then even more interesting now, I also want to cover predelivery business, business that I've not delivered or invoiced but I'm about to. So if I'm selling machinery or parts or equipment, and I'm about to invoice somebody for products made specifically for that company, I don't want to be stuck with that inventory either. So I also cover precredit risk as well."
Riordan: The products we've developed to meet that need are more flexible products to cover export transactions, more reliance on letters of credit backing exports. We cover buyer- and supplier-type credit. When there are defaults, it's more political risk. We provide political-risk coverage, and we expanded into that comprehensive type of coverage about five years ago. We are involved in manuscripting in each and every case rather than developing new products. So we are enhancing the contract.
Q: What's driving the demand for medium-term trade-credit products now?
When it comes to such trade-credit products, there are five or six drivers. The drivers are usually this: I've got a series of bad debts--what am I going to do? The other drivers are more likely to be: We're venturing into a new market; we're going to sell a new product or change of product; we want to move away from letters of credit. That's a big one. Whereas in Europe there's not much use for letters of credit anymore, here there still is.
Because most corporations (exporters) prefer not to keep medium-term receivables on their balance sheets, the rising demand for medium-term credit is really driven by banks. Banks generally are not earning sufficient returns on short-term trade finance loans to emerging market obligors because there is presently so much liquidity for this loan class. In order to earn higher returns, banks are tending to offer medium-term loans, and they are sometimes courting second-tier obligors. Banks will seek to share risk on these deals with other banks or with credit insurers. Of these two risk-sharing methods, credit insurance is often viewed as a favorable option as banks will not have to disclose loan details to competitors.
is managing editor of Risk & Insurance®.
October 15, 2005
Copyright 2005© LRP Publications