Premiums have gone through the roof. While the global economy is showing signs of recovery, don’t expect global trade credit insurers to have normal appetite for trade credit risk.
BY: Yoke Har Lee
Over 18 months ago, global insurers were hit by exposure to trade insurance claims began tightening their risk exposure, sending premiums sky-high and starting a slow-down in the underwriting of trade credit insurance.
Trade credit insurance premiums have risen by about 40% from a year ago. While the global economy seems to have stablised, trade credit insurers are not expecting a full-speed recovery for exports and remain vigilant in underwriting new risks.
Exporters seeking trade credit insurance cover will continue to have to pay high premiums for cover while sectors such as wool and timber exporters will find it hard to get cover for trade credit insurance, industry officials say.
Burke Steel, managing director of Euler Hermes New Zealand, says trade credit insurers will not be relaxing their tight risk management but will continue to underwrite businesses that are viable so exporters can continue trading.
“There has been a stabilisation in the market following a sharp deterioration. Insurers have seen significant underwriting losses – that’s been a clear and distinct trend from 2008 until now. Exporters have to be realistic in what they can or can’t do.
“Everyone’s got to get through this. With proper application of risk evaluation, and realistic expectations, we can continue trading. We are determined to offer the best scope of cover but there is no getting away – the market is still difficult,” Steel says.
QBE’s New Zealand manager for Trade Credit, Michael Kayes, says there is more positive economic data in the market. “There’s no end to enquiries. From an insurer’s point of view, we have to assess if we can underwrite the risks, and at what limit. The biggest hurdle for companies is whether they have the capital base or the strength on their balance sheet.”
Atradius Trade Credit Insurance’s Australia/New Zealand managing director, David Huey, says: “Underwriters are showing a gradual easing of the post-global financial crisis conditions as our leading indicators start to show a positive trend. New business channels are definitely more active and our quoting pipeline is growing.”
He adds: “We have started to adjust our risk appetite upward to reflect the change in the recovering economic environment. The rate of that upward movement will track the respective economies in the domestic and export markets we cover.”
Out of Favour
Capacity (for risk) in areas such as textile and construction is still restricted although beginning to ease, Heuy says, adding business has not returned to 2008 levels, although more normal risk profiles can be expected in 2010 and 2011.
Three of the world’s key trade credit insurance players have had to deal with massive trade credit claims when the global economy went into recession following the US financial crisis caused by the implosion of banks’ overwhelming exposure to mortgage related financial products.
Atradius Credit Insurance, a global trade credit insurer, reported a full year loss of EUR193.4 million in the 2008 financial year due to the difficult economic environment and losses associated with trade credit claims.
Euler Hermes, another global player, reported an operating loss of EUR71.1 million, compared with a profit of EUR137.5 million for the first nine months of 2008. The loss was due to net cost of claims. Its net income was EUR900,000 for the first nine months of 2009 (2008: EUR152.3 million).
Across the ditch, QBE International announced a record after-tax profit for the half-year ended June 2009, of just over A1$ billion, but had claims of A$145 million on trade credit and other credit-related insurance policies.
Its annual report says the Australian (including New Zealand) operations have been extensively reviewed and the company has ceased underwriting in some segments.
Neil Bhikharidas, from Aon Trade Credit (Broking), says: “A lot of companies have perked up to the fact that trade credit insurance is difficult to obtain and there are certain hurdles to cross. There are lots of enquiries [for trade credit cover] but there is a certain level of auditing that goes into measuring the price, relative to the cost of the risks, to give insurers the level of comfort attached to the relative risk environment.”
For exporters in need of trade credit cover, there is a need to be attentive to obtaining detailed financial information on their buyers. Exporters have to accept that over the next six to nine months insurers are not likely to soften their position on their risk management, Bhikharidas says.
Insurers say dramatic withdrawals from the market by trade credit insurers have ceased but insurers are more vigilant and circumspect in what type of trades they want to provide cover for.
A new pricing model is now in place, one that is 40% above 2008’s level. The new pricing model is reflective of insurers’ risk cover to underwrite business. New underwriting guidelines have also been put in place, typically reducing cover from about 90% to 85%. Limits on charges for every policy assessed have also been raised among insurers.
During the past 18 months, many companies have restructured, but there is no guarantee the restructuring would result in profitability.
“For many companies, they would be dipping into their reserves so in a stagnant 2010, nothing would have changed substantially that would increase profitability dramatically. This may impact the level of support from financiers,” according to Bhikharidas.
Export Credit Office
The Export Credit Office’s (ECO) manager, Carmen Moana, says there has been demand from overseas buyers for performance bond guarantees and new a facility will be made available to meet some of these bonds issued by exporters’ banks.
In November the government announced an additional $200 million in funding for exporters in trade credit and related products.
This is on top of a February revamp of the ECO’s products and processes to make them more market-friendly. The government gave exporters a shot in the arm by providing $50 million to ease trade credit cover for exporters.
In July, the ECO introduced co-insurance with Euler Hermes, providing top-up cover for exporters at their cover limit with Euler Hermes or in cases where the insurer has decided to withdraw cover.
Moana says a similar deal is being worked out with Atradius.