1 March 2011 Insurance

Credit where credit's due

To much of the insurance and reinsurance world, the credit crisis of 2008-09 is but a distant memory. Insurers and reinsurers have much more pressing issues to contend with—major global catastrophes, the implementation of Solvency II, a soft market.

But some parts of the industry remain haunted by the events of 2008- 09, when credit disappeared, almost overnight, from vast swathes of the banking world and financial markets. Specifically, trade credit providers say they are still suffering the effects of the crisis.

“The biggest issue is that during 2008-09, a lot of trade credit insurers cancelled credit limits midway through the policy year for insureds,” says Mike Holley, chief executive of Equinox. “This led people to liken it to an umbrella that is there when you don’t need it, but when it rains the cover is taken away.”

These actions resulted in bad press for trade credit providers. But there is also a feeling amongst some that they did their best in very trying circumstances.

“Trade credit insurers have been attacked by the media and by banks,” says Benoit des Cressonnieres, chief executive officer, Euler Hermes Reinsurance AG. “But we were able to manage the crisis and return to profitability within one year. The reinsurers give credit for managing risks well.”

Informed decision-making

Trade credit insurers decide what risks they will and will not take on much like any insurer—they come to a decision based on a range of factors. And like other companies, the decision will partly depend on what risks they already have on their books and the extent to which they wish to diversify.

“Different insurers have different levels of appetite at different times. It depends on what they already have in their books, as everybody is trying to achieve a good spread,” says Holley. “Sometimes people are selective because of what they already have. Sometimes they are selective about a certain risk at a particular time as that sector might be having a bad time—construction in Spain at the moment, for example.”

The same is true for reinsurers.

“There are certain trade sectors that reinsurers are more concerned with, but in many respects, the insurers and reinsurers have similar views,” says Nick Ayres, senior broker, global re specialty credit and financial risks team, Aon Benfield.

“If reinsurers agree to subscribe to a treaty, there are unlikely to be significant or serious differences of opinion on portfolio content, as the underwriting reviews by the reinsurers would highlight these in advance.”

Along with a good understanding of the risks, communication is also a key part of this process.

“As a reinsurer, we must analyse and understand the book that our primary clients are insuring,” says Clotilde Spignesi, class underwriter for trade credit & bonds in the worldwide reinsurance division of Liberty Syndicates. “During these discussions, various topics are discussed in depth, and in the case of specific concerns, we always share our views with our primary clients.”

The role of brokers

Following the events of 2008-09, some companies were wary of buying trade credit insurance—not least because they wondered whether their cover would be withdrawn when it was most needed. Some even considered self-insuring.

However, brokers have played an important role in retaining interest in trade credit coverage by further developing the services that they offer. “It is not a mandatory insurance product, and brokers now provide more added value in particular to retain companies which wanted to self-insure,” says Holley. “For example, some brokers have hired credit analysts of their own, so that they can provide more of a direct credit assessment service rather than just basing the policy with the provider that offers the more attractive price.

“Sometimes they have a challenge. Some have had certain habits of always placing in markets, but they have had to keep up-to-date with what is going on and how things are changing. However, they are generally doing well and, in some cases, they are driving the change as well, which is good.”

Ayres adds: “In the reinsurance market, the challenges for brokers have changed in the last two years. In 2009, there was a need to secure capacity above almost everything else, but the improvement in results and arrival of more capacity means that reinsurance brokers’ main challenges have surrounded the terms and conditions of treaty placements.”

Since the credit crisis, as companies at both ends of the supply chain seek to protect themselves against losses, demand for trade credit insurance has continued to rise. And this demand has been met with new capacity arriving in the market.

New challenges

One reason why the market has seen so many new entrants is because technology has lowered the barriers to entry. “It is becoming easier to access the information they need to assess credit risk and so to a certain extent that is opening up the market to new entrants,” says Holley.

Most participants also agree that more competition is a good thing. “I see the marketplace becoming more diverse—at the moment, premium is concentrated on the three monoline insurers, which still have around 80 percent of the premium in the market,” says Holley. “I think that the market will become more diverse, with more choice, with more multi-line players entering the market offering trade insurance in different flavours.

“This will be good, because it will help to grow the market. I also see the 80 percent share which the three monoline insurers have also coming down as new entrants enter the market.”

Much like the rest of the insurance and reinsurance world, trade credit businesses are also bracing themselves for the impact of Solvency II. The affect it will have on the market is difficult to predict, however, and much depends on the final draft and its interpretation, argues Cressonnieres.

“It will depend on the final fine-tuning of Solvency II and on the individual company. Some smaller insurers may have to put their house in order and try to make their case to the regulator. One way to do that might be to buy more reinsurance, but it won’t change the behaviour of the main players a great deal.”

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