The state of the industryThe export credit and investment insurance industry islooking healthy, both for private and public suppliers ofcover. However, there are a number of risks - clusteredaround premium levels, claims and regulation - that couldchange this benign situation. By Vinco David, Berne Union Secretary General.
Editor-in-chief: Jonathan Bell
Editor: Lucy Palfreeman
Sub-editor: Helen Castell
Production editor: John Smith
2 Cover story
5 Reaching out to exporting SMEsFor the third consecutive year, EKN, the Swedish ExportCredit Agency, reports a record level for the number ofsmall and medium-sized business customers in 2016.Increasing numbers of such companies are takingadvantage of business opportunities in emergingmarkets around the world with the help of the SwedishGovernment's export credit guarantees. By Carl-JohanKarlsson, head of the SME business area at EKN.
8 Time to stand up and be countedThe volume of private insurance market credit riskmitigation is growing – but does the industry do enoughto voice its activities and concerns to regulators? ByPeter Sprent, head of global financial risk at LibertySpecialty Markets.
10 The global opportunities for insurers prepared toembrace changeThe credit insurance industry needs to break into newgeographic markets and adopt new technology to keeppace with changing regulation and stay cost competitive.By Jérôme Pezé, CEO and founder, Tinubu Square.
12 Building and operating an MSME export creditinsurance facility in BrazilABGF has been working on MSME full-range insurancecover aimed at facilitating prospecting and exports tonew buyers abroad. Marcelo Franco, CEO at ABGF,explains the new offering and how it was developed.
14 EXIM Hungary: Supporting small and largeSmaller ECAs like Hungary EXIM have a key role to playin both supporting SMEs and partnering with other ECAson large scale project financings. By Zoltan Urban, CEOEXIM Hungary.
This newsletter is sponsored by:
on international trade, finance and investment from the export credit and political risk insurance industry
Berne Union Newsletter, May 2017
Dear Readers,
Welcome to the first edition of the Berne Union BUlletin – a monthly digest of the latest news,views and statistics from the global export credit and investment insurance industry.
A highly-regarded publication amongst the trade finance community, The Berne Union Yearbookhas long provided a valuable annual summary of major industry trends and commentary fromrespected thought-leaders.
The BUlletin continues this traditional curation of interviews and thought-pieces from industryleaders, now reinforced by regular member news, surveys and market data, providing a reliablewindow into the industry for business partners across the world of trade finance.
This new publication is part of a wider movement within the Berne Union towards a more open,regular and inclusive relationship with the entire export and trade finance industry. We recognisethat the business partners of our members are valuable participants in this shared dialogue andwe aspire to build a communications infrastructure to support this conversation.
Berne Union Outreach NetworksBerne Union members provide cover for trade transactions equivalent to over 11% of totalworldwide annual exports, and our global network of export credit agencies, multilateralinstitutions and private insurers of political risks, collectively constitute a highly informativebarometer of corporate and sovereign creditworthiness, risk appetite and capacity across globaltrade finance.
The Berne Union is harnessing this expertise to develop as an outreach platform for businesspartners, stakeholders and participants across the trade community. The objective is to open abetter dialogue between the different elements of trade and foreign investment-relatedtransactions, leading to valuable cross-industry communication and increased cooperation, bothdigitally – including via The BUlletin – and face to face, through our Outreach Networks.
The first step in this project will involve a joint-session of the Informal Lending Network* andmembers of the BU’s medium / long-term committee, taking place next week (18th May)immediately following the Berne Union 2017 Spring Meeting, in Copenhagen.
Over the course of 2017, and beyond, the Berne Union will continue to develop a series of similarmeetings built around special-interest Outreach Networks with industry stakeholders, reportingon the main outcomes via The BUlletin.
We hope you enjoy the first edition and welcome any feedback you may have!
Kind regards,Paul HeaneyBerne Union Communications
*Informal Lending Network currently consists of: Czech Export Bank, EKF-Denmark, Eximbanka Slovakia, Export CreditNorway, Finnvera, GIEK-Norway, KfW-Germany, SEK-Sweden and UK Export Finance.
Avoice for the industry
Positive results for 2016But first the good news. 2016 was a positiveyear for most insurers. Business levels slightlyincreased to USD 1.9 trillion of insuredexports and foreign investments (includingguarantees and direct lending from a numberof ECAs – Export Credit Agencies). Applyinga more fine-grained examination however, wecan observe some variation in trendsbetween the different categories of insurers.On the one hand, private insurers of tradecredit (the so-called ‘short term business’)and political risk insurance were able toexpand the volume of their business toalmost USD 1 trillion – 8% higher than in 2015.Public insurers of short term trade credit,medium/long term export credit and foreigninvestments, meanwhile, generally saw asmall decline in volumes covered. However, atUSD 900 billion, this total volume for 2016 isstill a strong figure, and a positive indicator ofa healthy industry.
Claims payments decreased in 2016,compared to the previous year. In 2015 thetotal volume of claims paid as a result ofinsolvency or political events was 6 billiondollars: last year this figure was half a billionless. While this is a positive adjustment, itshould be noted that, in context, these figuresare still high – in fact not so much below thelevels seen in 2009, at the depth of the creditcrisis. This leads to some observations aboutthe risks the industry is facing at the moment.
Premium levels in the private market arehistorically relatively low, both for short termbusiness and for medium/long term creditand investment business. This is largely dueto strong competition between privateproviders of cover.
In the short term area this is mainly seen incompetition between the world’s threelargest providers: Euler Hermes, Atradius andCoface, although other private or semi-private insurers also participate.
In the medium/long term credit andinvestment insurance area we have seen a
large increase ofcapacity over the lastfew years, whiledemand has remainedstable. There arecurrently about 60providers of this typeof insuranceworldwide. Althoughthis business hascertainly proved to be
profitable over the last few years, one candoubt whether this is the main reason forgrowing market participation from bothinsurers and other capital market investors.Due to the sustained low interest rates forcurrencies such as the US Dollar and theEuro, investors are looking for investmentswith higher returns and one option is, indeed,credit and investment insurance.
We can see, then, that it is mainly drivers from the supply side keepingpremium levels depressed and once interest rates start to increase one can expect the supply of capacity to wane, whichmay eventually lead to an increase inpremium levels.
Figure 1 shows the total reported premiumincome for private members of the BerneUnion (for both credit and investmentinsurance) between 2008 and 2015, alongsideclaims paid for the same period. From thegraph we can see that total premium incomefor this business has declined some 13%between 2012 and 2015 and, while this dataonly represents a subset of Berne Unionmembers – and does not therefore give acomplete picture of absolute volumes – it isillustrative of the general trend towards softerpricing in the private market.
Figure 2. shows the average pricing –calculated as premium income / exposure –for each reporting line within the BerneUnion. In this graphic, INVS designates coverfor sovereign obligors, while INVO representscredit cover for other private buyers. ST and
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The state of the industryThe export credit and investment insurance industry is currently in arather healthy state, both for private and public suppliers of cover.However, there are a number of risks that could change this benignsituation. These risks are clustered around three themes: premiumlevels, claims and regulation.
Vinco David
INVI are the short term credit and investmentinsurance lines.
This illustration confirms the observationthat it is pressure from the supply side drivingdown premium income, through pricingcompetition, rather than falling volumes ofbusiness.
Claims levels The industry is currently profitable becauseclaims levels are under control. For thebusiness as a whole, average loss ratios arestable at around 30%, keeping risksmanageable and appetite high. However, aswe have seen above, strong competition andthe resulting soft market (for private insurers)has the potential to disrupt one side of thisequation and the current, relatively benign,situation may change if high volumes ofclaims remain sustained. If premium levelscontinue to fall, as claims rise, the resultingsituation would not be financially sustainablefor insurers.
We have seen this situation before, i.e.during the credit crisis from 2008 andalthough a new crisis is not expected, claimspayments have been markedly high in both2015 and 2016. Indeed, combined claimsreported by Berne Union members across alllines of business – including both privateinsurers and ECAs – are higher for theseyears than at any time since 2009, as shownin the top line graph and right hand axis onfigure 3., below.
Due to the relatively low prices of almostall commodities on the world market over thepast few years, countries in Africa and LatinAmerica, dependent on those commodityexports, are especially at risk. This situationhas a negative impact both on companiesactive in these sectors, as well as on theeconomies of these countries as a whole.Indeed, the top country for claims in 2016was Brazil, where Berne Union members paida total of USD 860 million in claims last year –around 16% of all claims paid worldwide.
Figure 3. also neatly illustrates this trend,with claims in the Americas showing highgrowth in 2016, especially for MLT business,which is generally speaking more closelycorrelated with the economic health ofemerging markets.
But there are of course also risks in highincome countries and despite a mildeconomic pick-up at the moment, claims hereare still significant. The agenda of the USadministration and Brexit will certainly impactinternational trade flows, but to what extent
and in which sectors is not yet known.These leads to the third theme: regulation.
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Figure 1
Note that figures for ‘sovereign’ cover and ‘other private credit’ cover are only availablefrom 2010 and 2008/9, therefore only include data for short term credit and investment(political risk) insurance.
Figure 2
* Average pricing is calculated as premium income / exposure
Figure 3
RegulationTrade barriers have never been good fortrade. There is an abundance of evidencethat, on its turn, international trade is goodfor prosperity. Self-evident as this may sound,not all politicians enshrine this ideal in theirpolicies and calls for protection of nationalindustries are common these days. Whilethere are sometimes good reasons totemporarily protect selective nationalindustries in their cradle phase; or a verylimited number of industries deemed asstrategic for a particular country; in general,protectionist measures eventually lead to adecline in productivity.
Typically, these kind of political measuresrather lead to a misallocation of resourcesand ultimately harm the competitiveness ofthose industries they sought to protect. Goodexamples are the US shipbuilding industry orthe so-called ‘zombie companies’ in China.But also, of course, exporters to countriesthat build trade barriers are affected. If, forexample, the US administration wouldimplement trade barriers, then certainlycountries like Mexico and Vietnam will feelthe impact, given the large proportion of theirexports bound to the US.
Worryingly, the number of calls forprotectionist measures has increased of late,and notably in high income countries wherepreviously such sentiments have been ratherexceptional.
As said, protectionism is not good fortrade, and hence not good for export creditand investment insurers. Cross-border trademay decrease, impacting on the topline ofinsurers. But it may also lead to a riskierenvironment with more insolvencies. Thereare at the moment no signs yet that this isalready happening, but this is certainly adevelopment for our members to monitor.
Another area of regulation relevant to ourindustry is that of banks. Banks are essentialfor the financing of trade and exports, and forproviding working capital to exporters andtheir suppliers.
For very good reasons, this bankregulation – now Basel III (some say Basel IV)and its implementation at national or regionallevel – has become stricter, partly as aconsequence of the credit crisis. Banks havebecome better capitalized and in general thisis a good thing. But implementing theseregulatory measures with a broad brushcould lead to less capital being available forthe financing of export and trade. That would,obviously, not be a good thing for export and
trade, and thus, eventually, for prosperity and,more mundane, the topline of credit insurers.
Banks, in particular European banks, haveto some extent – and with support of theBerne Union – been able to demonstrate toregulators that the financing of export andtrade is not such a risky business at all;certainly if covered by (public) insurers. TheEuropean Commission, for example, hasrecently launched a proposal for theimplementation of Basel III whereby thefinancing of trade and export covered bypublic insurers will attract lower capitalrequirements than originally proposed. This isa laudable development, but may not tackleall areas of insured export and tradefinancing. It is primarily up to the banks – asthe institutions that are regulated – to seewhether a broader capital relief is needed tofully continue financing trade and export, butas insurers of trade, members of the BerneUnion continue to stand behind the risktransfer products they provide.
On a more positive note: In the course oftackling these regulatory challenges, bankshave become more aware of the positiveimpact credit insurance can have on theirbalance sheets – not only for capitalrequirements reasons, but also by enablingthem to better manage their aggregates.
In summaryThe export credit and investment insuranceindustry has recovered remarkably well afterthe global credit crisis. It is currentlyreasonably profitable, largely due to the factthat claims are under control. But this maychange if claims were to continue at elevatedlevels for longer periods. Claims levels can beexpected to rise if commodity prices remainlow (affecting commodity exportingcountries) and if more trade barriers are putup, affecting countries with large exports tocountries implementing these protectionistmeasures.
Stricter bank regulation, too, can impacttrade and, hence, the results of our industry.However, both exporters and members of theBerne Union have shown quite someresilience and adaptability to a changingenvironment and despite these challenges, Iam largely optimistic about the future of ourindustry. �
Vinco DavidBerne Union Secretary General
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During 2016, EKN contributed to more SMEexport transactions. Seventy-nine SMEsbecame new clients of EKN and guaranteevolume also increased. This is the result of anincreased sales-driven and customer-focusedapproach through regional presence,intensified marketing and sales activities aswell as collaboration with local bank offices.During the year, EKN employees made morethan a thousand visits to companies andbanks around the country.
The number of EKN guaranteed SMEstransactions in 2016 increased from 537 to599. During the year, 271 companies in thissegment were EKN clients, compared with263 the previous year. More and morecompanies offer their customers credit andinsure their risk with EKN or get help withfinance, with the bank insuring its risk on thecompany with EKN.
Variety of industriesSMEs are particularly important fordeveloping Swedish exports. EKN has aspecific mandate to promote thesecompanies’ exports and the guaranteesissued relating to SMEs’ export transactionstotal around €260 million in 2016. This meansa contribution to Sweden’s GDP of €125million and around 1,300 jobs. Theguaranteed SME companies have 5,507employees in total. This demonstrates EKN’ssignificance as a complement and catalyst forthis corporate segment’s exports to moredifficult markets. EKN helps many of thesecompanies to take the first step out into theexport market.
The SMEs that complete transactions withthe assistance of EKN represent manydifferent industries. The largest section,
equating to 62% ofthe guarantee volume,is made up ofcompanies that sellequipment tomanufacturingindustry, such aselectroniccomponents, circuitboards andmachinery. After this
comes wholesaling, especially in paper andcraft paper. Wholesaling represents 19% ofthe guarantee volume. In third place arecompanies involved in technical consultancyand the building sector, and companies thatare active in design and interiors. Companiesthat are sub-suppliers to the exportingindustry are also EKN customers.
Priority target groupSweden is a small, export-dependent country.Nearly 50% of the country’s GDP consists ofexport revenues. Successful Swedishmultinational companies such as Ericsson,Scania, Volvo and SAAB have used EKN’sguarantees for a long time in order to boosttheir competitiveness in internationalmarkets. However, SMEs utilise the sameopportunities to a far too low extent.
The vast majority of Swedish exports go toneighbouring countries in Europe - above allto our closest neighbour Norway, and toGermany and other EU countries. The manyyears of weak growth in a number of OECDmarkets have meant a greater need to takeadvantage of the higher growth in marketsfurther afield, especially in Asia, but also inthe Middle East and the Gulf countries, Africaand Latin America.
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Reaching out toexporting SMEsFor the third consecutive year, EKN, the Swedish Export CreditAgency, reports a record level for the number of small and medium-sized business customers in 2016. Increasing numbers of suchcompanies are taking advantage of business opportunities inemerging markets around the world, with the help of the SwedishGovernment's export credit guarantees. By Carl-Johan Karlsson, headof the SME Business Area at EKN.
Carl-Johan Karlsson
EKN began a specific drive to reach out tomore SMEs already in 2007. A separatebusiness area with particular focus on thetarget group was created as a first step. TheSwedish SME segment is a very diversetarget group, and there are several challengesin reaching out to them in regard to exportcredit guarantees.
SMEs’ challenges In Sweden, approximately 14,000 companieswith exports to emerging markets have fewerthan 250 employees. Most operate as soleproprietorships and have limited resourcesand interest in expanding their exports. Thesegment's exports to emerging markets islimited, as are the development plans forreaching more markets. Many Swedish SMEsare also suppliers to the major exportingcompanies.
There is a more widespread businessculture among Swedish SMEs, compared tomany other countries in Europe, not to insuretheir customer credit. It is more commonthat Swedish companies demand advancepayment. Only 20% of SMEs exporting toemerging markets responded that they offercustomers credit, according to a survey EKNcarried out in 2015. Of these, 24% reportedhaving used credit insurance, which is a bigincrease compared to the previous year when14% answered yes to this question.
Another challenge is the low awareness ofEKN among the target group - an awarenessof less than 50% in 2016. The perception thatgovernment guarantees are only for largecompanies is also widespread among thosewho are familiar with EKN.
Long-term focusAfter the financial crisis, EKN began a moreintensive drive to reach out to more SMEs. Anew strategy for a greater SME focus wasadopted by management and the Board.Clear results were able to be presentedalready in 2014. The number of guarantees toSMEs rose to record levels and the number ofcustomers grew steadily. Since then, asmentioned earlier, a new record was set inthree consecutive years.
The key focus areas behind the positivedevelopment can be summarised in threepoints; increased regional presence,intensified marketing and productdevelopment.
Increased local presenceIn the first year of executing the new SME
strategy, EKN established local offices in
Göteborg and Malmö (the second and thirdlargest cities in Sweden). During 2016, thelocal presence has been further increasedwith a new office in Umeå (in northernSweden) and with more employees inGöteborg, as well as with external financeconsultants in five cities throughout Sweden.The consultants have a well-developednetwork in their regions and work closelywith local industry and commercial banks.They extend the reach of EKN’s regionalpresence.
Intensified marketingOver the past two years, EKN has investedmore in advertising and various marketingpartnerships to reach out to SMEs. For twoyears in a row, EKN has been a partner to thenationwide growth company competition, DiGasell, run by Dagens Industri, the leadingSwedish business newspaper. Thiscompetition awards the most successful fast-growing SMEs in Sweden. Events aroundSweden enable networking with thesecompanies and the opportunity to promoteEKN and EKN's offer to the target group.EKN awards an annual prize to the growthcompany that has been most successful withexports to emerging markets. EKN has alsoexpanded its presence in social media andhas customised marketing messages to thetarget group.
Product adaptationFor many SMEs it is not primarily to securetheir receivables that they turn to EKN, but tostrengthen their ability to get the bank toprovide financing. Banks that issue contractguarantees and lend working capital andinvestment capital can share the risk in thesub-supplier with EKN. EKN's working capitalloan guarantees and investment guaranteesare important instruments for SMEs. Theguarantees have been developed to betteradapt to the needs of the target group, andare now aimed at sub-suppliers too.
When companies insure their receivableswith EKN, this can act as security for a bankloan. This is the main reason why SMEsbecome EKN customers. Companies alsoneed the banks’ support with working capitalcredit and bank guarantees. When EKNshares the bank’s risk on the company, itbecomes easier for the company to obtainfinance from the bank. Around 97% ofSweden’s local bank offices are aware of EKN,and collaboration with the banks is vital toenable more SMEs to grow internationally
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with EKN’s assistance. Around 80% ofguaranteed transactions for SMEs come viathe banks.
Firmly anchoredThe SME focus is firmly anchored in EKN’sBoard and management and this has beencrucial to the success of the SME initiative.But even the principal - the SwedishGovernment - has explicitly given EKN thetask of raising awareness among SMEs abouthow guarantees can strengthen exportcapacity as part of the Government's exportstrategy.
A couple of years ago, in 2015, the SwedishGovernment adopted a new export strategywith the aim of increasing Swedish exportsand encouraging more companies to sell toemerging markets. It was stated that SMEsneed to increase exports, and a number ofpriority export markets among the emergingcountries were defined. Furthermore, theexport strategy established that the Swedishgovernmental export promotionorganisations should improve theircooperation and facilitate contact channelsfor companies.
Asia is an attractive export marketIn order to increase knowledge about SMEs
need for support from EKN, EKN hasproduced a report for a number of years onSMEs exports to emerging markets. Thereports have provided clear information thatthe number of companies exporting toemerging markets in the SME segment isgrowing year by year. The value of exports toemerging markets from Swedish SMEs is alsoincreasing. The number of SMEs exporting toemerging markets reached record levels forthree years in a row. At the same time,exports to emerging markets account for only13% of the total exports of SMEs, according tothe latest survey conducted in 2015.
Asia is clearly the hottest growth marketfor Swedish SMEs. Asian markets account fornearly half of SMEs’ exports to emergingmarkets. It is also there that exports havegrown most strongly in the past five years -the volume has increased 65% since 2005. In2015, exports grew by 12%, and China is thegrowth market that most companies areattracted by. It is a positive that SMEs arefocusing on Asia, given the potential of thesemarkets.
Focus going forwardBecause of the large proportion of guaranteevolume coming from banks, EKN is now
working to further develop its relationshipwith local bank branches around the country,to increase their knowledge about how EKNcan enhance the bank's ability to financesmall enterprises’ export business.
The challenges ahead include raisingawareness among SMEs, which, despite greatefforts, is moving slowly. This requires acontinued high level of activity in terms ofboth extensive and targeted marketing. TheSMEs also play a leading role for greaterflexibility and efficiency in EKN's internalprocesses and product development. Thedemand for strong commercial expertise in agovernmental structure increases for EKN’semployees.
Sweden is a country with a high level of ITmaturity and is at the forefront in theutilisation of the opportunities of web-basedbusiness models among entrepreneurs who
take advantage of the opportunities thatarise in a digital and connected world. Thesecompanies are ‘born global’. The focus is noton one market at a time, but rather on ten ortwenty. Exports are also becoming moreservice-based, and global value chains arebecoming more complex. This requiresflexibility and agility for the relevance ofexport support.
Swedish SME's exports to emergingmarkets, as previously described, are multi-faceted. For example, EKN’s customersinclude companies selling ice hockeyequipment to Russia, forestry machines tothe Philippines, pilot boats to the United ArabEmirates and blood analysis systems toAfrican countries south of the Sahara.
However, there is potential for morecompanies to achieve success with exportsand growth in new markets, and EKNcontinues to further extend the focus onreaching out to SMEs. �
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Only 20% of SMEs exporting toemerging markets responded that theyoffer customers credit, according to asurvey EKN carried out in 2015. Ofthese, 24% reported having used creditinsurance, which is a big increasecompared to the previous year when 14% answered yes to this question.
Over the last 20 years, the private sectorinsurance market covering non-payment riskhas gone through a transformation in bothscale and capability that has not been fullyrecognised other than by users and providersof this credit risk mitigation tool.
Not only has the private market grownexponentially in terms of numbers ofparticipants and per risk capacity, it has alsoconfidently withstood the global financialcrisis and weathered the recent commoditydownturn, supporting clients paying billionsof dollars of claims in the process. BerneUnion numbers show the significant amountof credit insurance coverage provided byprivate sector members in 2016, although it isworth noting that most private sectorinsurers are not members of the Berne Union.
More banks using private insurersBanks have been active users of non-payment coverage from the private marketfor over 20 years but this has increasedsubstantially since the global financial crisis.A large majority of participants in theInternational Chamber of Commerce (ICC)Trade Register report for 2016 are clients ofthe private market, although only exportcredit agency (ECA) support of tradetransactions is acknowledged in the report. Inaddition, banks active in the financing oftrade receivables benefit from billions ofdollars of coverage provided by wholeturnover insurance policies. At the long-termend of the financing spectrum, eight out ofthe 10 most active project finance banks arecore clients of the private market.
Traditionally, banks have used non-payment insurance to manage counterpartylimits and credit risk when considering newtransactions. Since its acknowledgement bythe Basel Committee,1 many banks have alsobeen able to deploy this product for capital
relief. More recently,private insurers havebeen partnering withbanks to help manageportfolios ofexposures already onthe books of thebank. For example,Risk.net’s Risk Awards2017 named BNPParibas Credit
Portfolio Manager of the Year for itsinnovative approach, which included thesharing of existing facilities with the privatemarket, with the specific aim of obtainingcapital savings while avoiding some of thedownsides of traditional credit portfoliomanagement tools such as credit defaultswaps.
In this period of growth, underwriters haveconcentrated on developing their productsand building their teams, platforms, pricingmodels and client and broker relationships.Engagement with a wider audience ofstakeholders has taken a back seat.
Raising private insurer profile withregulatorsRecent changes announced or contemplatedby bank regulators – the ‘Basel IV’consultation on changes to the internalratings based models, and the EuropeanCommission’s amendments to the CapitalRequirements Directive (CRD 4) and CapitalRequirement Regulation (CRR) – havehighlighted the need for the private market totake a more proactive role in ensuring that itsvoice is heard as regulators continue to revisethe capital framework for banks.
While there is significantly more to bedone to recognise the role the private marketplays in supporting international trade andinvestment, many private insurers have
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Time to stand up andbe counted The volume of private insurance market credit risk mitigation isgrowing – but does the industry do enough to voice its activities and concerns to regulators? By Peter Sprent, Head of Global Financial Risk at Liberty Specialty Markets and Audrey Zuck, Director, A2Z Risk Services Ltd.
Peter Sprent
increased their profiles in finance industryassociations and other internationalinstitutions.
Private market membership in the BerneUnion is growing, as is participation in theInternational Association for Credit PortfolioManagers (IACPM) and in the InternationalTrade and Forfaiting Association (ITFA),which formed an insurance committee toaddress its members’ interest in the product.In its submission to Basel IV, ITFA noted that“insurance, although a conditional product,has responded consistently in paying claimsto banks under non-payment policies,justifying banks’ treatment of insurancepolicies as guarantees.”2
Private and ECA – are theyeqivalent?The private market product is equivalent toECA coverage in as much as: � Performance is uncorrelated to underlying
risk� There is a direct claim against the insurers,
which are located in strong and stablejurisdictions
� Coverage is provided by highly ratedentities (generally minimum A- financialstrength rating from Standard & Poor’s orequivalent rating agency)
� Insurers conduct their own credit analysisbefore a risk is selected to be covered,providing independent validation of thecounterparty risk.The ICC’s 2016 Trade Register noted that
medium- and long-term trade finance is lowrisk largely because transactions are coveredby investment-grade ECAs sponsored byhigh-income OECD governments which havenever defaulted on a valid claim3. The privatemarket also has an excellent track record ofpaying out valid claims, but information ispatchy at best. While brokers have beenproviding their claims data as proof4, there isa growing need for more detailed andcomprehensive data to support the wideradoption of the product by banks and helpconvince regulators and government bodiesthat the product is a strong credit riskmitigation option.
In addition to strong claims performance,the private market has other unique benefits:� Multi-line insurers’ other lines of business
are highly uncorrelated with credit defaultcoverage
� The prudential regulatory regimes in themain jurisdictions impose substantialcapital requirements on private insurers,
designed to ensure that private insurersalways maintain sufficient capital to fulfiltheir payment obligations to policyholders.In the rare event of an insurance companyinsolvency, applicable law and regulation inmost jurisdictions would ensure that, aspolicyholder, the bank stands in aprivileged position ahead of regularcreditors
� As witnessed by the BNPP examplementioned above, private insurance isflexible in application, with the ability tocommit quickly to coverage once riskanalysis has been satisfactorily completed.Looking specifically at the proposed
amendments to the CRD4 and CRR, while therationale for excusing loans insured by ECAsfrom the leverage ratio is consistent with therisk weighting of zero for banks’ exposure totheir own governments in local currency, webelieve that the focus solely on ECAs’provision of credit risk protection is a missedopportunity.
The private market is an important partnerfor banks, and private insurers are anincreasing presence in internationalinstitutions supporting the financing of theglobal economy. However, the private markethas yet to pull together coherent andconsistent data to demonstrate to regulatorsand other interested parties the performanceof the private insurance product thatwarrants more explicit recognition of its meritas a credit risk mitigant. With the help ofbanks, industry groups, and private insurerswilling to provide more comprehensivepremium and claims data, we believe we canprove that the size, scale, professionalism andother benefits of the private insurance marketjustify greater recognition. �
Notes1 Basel Committee on Banking Supervision: QIS3, FAQ
E: Credit Risk Mitigation, FAQ62 Letter to the Basel Committee on Banking
Supervision dated 24 June, 20163 2016 ICC Trade Register report, pp 51 and 734 For example, BPL Global, a specialist trade credit risk
broker, notes that over the last 30 years and inrespect of claims for exporters, traders and banks,overall 95.5% of their claims for non-payment weresettled in full; 3% were settled amicably but not forthe full amount because of operational issues withrespect to the underlying transaction; and only 1.5%were denied either for breach of policy condition orbecause the client could not produce evidence tosupport the claim.
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The international credit insurance industryhas proven itself to be very resilient andhighly credible, particularly through therecent economic downturn. However, thereare vital geographies and market segmentsthat are simply untapped from a creditinsurance perspective. And to realise thehuge opportunities they present, the industrymust re-evaluate its proposition to customers.
The industry also needs to adjust to a newecosystem and look at how it could improveoperations and take advantage of an overhaulof its services. For an industry that has beensuccessfully operating for over a century, thiswill mean embracing change and pushing atestablished conventions – but the rewardswill be worth it.
Many of the processes and product-typesthat characterised the early days of theindustry are still in use, and while it could beargued that these have held insurancecompanies and their customers in good steadfor a long time, they are now ripe for change.What we want to see is an expansion of thisestablished model. Worldwide premiumshave been increasing since 2003, but mainlyoutside the core European markets, and theindustry has a great opportunity for furthergrowth if it is outward looking and bold.
The long-standing influence of a handful ofEuropean insurers has brought benefits.Critical mass has kept costs down, the markethas diversified within controllable limits andmulti-country services have been developed.Risk control has been supported by a largebase of European buyers.
What about the rest of the world? There areboth challenges and opportunities, and thereare many territories that offer highlyadvantageous opportunities for marketpenetration. Growth of credit insurance in theUS, for example, has been restricted by anopen business culture, acceptable bankruptcy
legislation, a perceivedhigh cost, and verylimited export flowfrom mid-sizedAmerican companies,particularly to marketsother than Canada,Mexico and a fewEuropean countries.Additionally, creditinsurance never
managed to integrate effectively with thefinance industry, notably to provide jointreceivable financing solutions to SMEs.
What businesses in that area are missing isthe massive emergence of global tradeprospects with burgeoning markets in the FarEast, Latin America, India and other parts ofAsia and Africa. Exporters must be eyeingthese markets and looking for ways tomaximise opportunities while still mitigatingtheir risk. Emerging markets too – Asia-Pacificalone saw trade expand by 25% to 33% in the10 years from 2003 to 2013 – have even moreoptions for the credit insurance sector.
Embracing technologyOne barrier for the industry is its oftenentrenched processes, which need to beimproved. Digitisation is having its effect onproduct delivery processes, distribution,supply chain integration, the emergence ofalternative payment and settlement solutionsand data analytics. Meanwhile, while SolvencyCapital Requirements are boosting creditinsurance, they also demand more efficientattention to detail and improved governanceand controls.
Insurance companies are findingthemselves to be part of an extended andmore rigorous ecosystem and it’s not alwaysclear that they understand the position theyoccupy or – even more importantly – the
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Berne Union Newsletter, May 2017
The global opportunitiesfor insurers prepared toembrace changeThe credit insurance industry needs to break into new geographicmarkets and adopt new technology to keep pace with changingregulation and stay cost competitive. By Jérôme Pezé, CEO andfounder, Tinubu Square.
Jérôme Pezé
advantageous position they should be aimingfor. This is a challenge that must be faced.While they have met the demands of theirtraditional core markets including brokers,insureds and reinsurers, and even the needsof extended enterprise, including tradeassociations, banks, regulators and investors,what they now have to do is face thechallenges of disruptive technologies andinnovations that will have an impact on theirbusiness. This includes new payment andsettlement solutions, changes in the supplychain and technology developments.
One topic that is causing ripplesthroughout the industry is blockchaintechnology, with one of the main concernsbeing the databases that store details onbuyers. These are no longer the sole domainof the credit insurers, and as new entrantscome into the market, offering moreeconomical access to buyer information,insurers will have to compete on a new stage.This is a challenge that will require freshstrategies and specialised services to keepexisting clients engaged and attractprospects, and is particularly pressing interms of meeting the individual needs ofclients in different geographical territoriesand industries.
If credit insurers don’t want to fall behindthey will need to be more effective, not just inthe way that they choose to communicatebut in the speed with which they deliverinformation. It has to be in real-time so thatthe credit limits of buyers are up-to-the-minute and any area of risk can be assessedaccurately.
Technology is crucial to this. Not only doesit enable the insurer to make informeddecisions based on accurate information, italso speeds up the process, avoiding afrustrating wait for clients. The same appliesto payments, which may continue for sometime to be transferred in the traditional waybut which will inevitably start to useblockchain technology in the years to come.
Blockchain is part of the ecosystem thatthe insurance industry is now operating in.Critical mass is no longer the key competitiveadvantage as work-around solutions haveemerged, but flexibility and the benefits ofinnovation are becoming paramount. Thesooner that the market starts to work withtechnology providers, the sooner digital andoperational transformation can take place.With the right checks and balances in place,insurers should not be afraid to embracetechnology progress.
In fact, many insurance companies arealready overhauling and updating theservices they offer to customers. A few haveembarked on the digital transformation oftheir organisations. Such moves haverequired vision, a methodical approach,commitment and consistency. But it positionssuch players in the forefront to take thebenefit of the opportunity offered to thecredit insurance industry as well as to fulfiltheir mission to the business community.
Best practice – rules and provisionProvision of best practice enhancesprocesses and good governance for mid-sized and smaller companies and is reapingdividends in the form of support fromreinsurers. Instead of maintaining their focuson traditional products, insurers should bekeen to build tailor-made solutions and adopta multi-niche, customer-centric strategy toboost growth.
There are ‘golden rules’ that insurancecompanies really should abide by and whichthey will be aware of. They include: Identifyingthat they are capable of operating effectivelywithin the market; that they can oversee localrelationships and partnerships with a goodcultural understanding; that they canaccordingly empower their partner with know-how transfer; that their products and servicesare competitive; and that they have access tolocal up-to-date intelligence. With these inplace, it is then much easier to diversifygeographically and across different marketsectors with unfamiliar economic cycles.
With emerging markets growing inprominence and accessibility, competitiveinsurers can use their unique expertise andknowledge, supplemented by localpartnership help, to build culturally andeconomically appropriate solutions. In reality,any geography is accessible if you have thestrength and business intelligence to tackle itconfidently. There is a trend for companies tooffer expertise in multiple niche areas, anddiversification helps to spread risk, as long asthe insurer is able to support each of thoseareas within the golden rules.
Now is the time to cast off the cloak ofconvention and look around for partners thatcan help make inroads into new markets. It’sthe time to embrace technology that deliversmore accurate intelligence, and it’s the timeto start honing convincing arguments aboutwhy credit insurance is needed in these vastemerging geographies. The opportunities formarket penetration are too rich to ignore. �
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In 2015, Agência Brasileira Gestora de FundosGarantidores e Garantias (ABGF), acting asan export credit insurance agency, deployeda micro, small and medium enterprises(MSME) export credit insurance officialsupport scheme together with the GuardianAuthority*. The instrument was developedover two years and required extensiveresearch and deep discussions between theBrazilian authorities and exporters fromdifferent sectors and regions to capture theessence of business trends and demand.
The history of MSME export creditinsurance support is short, dating back to2013 when ABGF was requested to providefindings on market gaps in the segment andto assess the real need for such a tool.Brazilian exports have been extremelyconcentrated in the hands of 500 enterprises,which are responsible for 80% of thecountry’s total exports. The remaining 20%comes from 23,000 enterprises with annualoverseas sales worth up to $5 million.Nevertheless, only a small fraction of Brazil’sMSMEs are active exporters because of aguarantees market gap. Whereas indeveloping economies MSME exportsrepresent on average 10% of total exports,Brazilian MSMEs account for no more than2.5% of the country’s exports.
Product researchIn our research, we quickly realised thatMSMEs’ inability to provide the guaranteestraditionally requested by commercial banksmarginalised an enormous number ofenterprises from the financing system. Thisunconducive environment needed to becorrected if MSMEs were to venture intooverseas markets and increase their share oftotal exports. Official support in the form ofexport credit insurance seemed to be the
right tool to fill thegap as banks werereluctant to engage insuch MSME dealsgiven that theysystematically do notpay off. On the otherhand, many MSMEswere seeking exportcover on their own viaself-insurance.
The desired solution to MSMEs’expectations would have to be simple,scalable and far-reaching from the point ofview of the enterprises, the banks and theGuardian Authority. At the same time, it wasimperative that any proposed scheme shouldhave the lowest possible administrative costto take into account the budget constraintsand ABGF’s “more with less” public policyapproach.
Another key design issue was how to builda platform on which all players could interactsecurely, from the initial application to theissuance of the policy. Moreover, the marketdynamics called for a tool that expedited theprocess of application, risk assessment,pricing and policy issuance as fast aspossible. Adjustments were required afterexhaustive testing and the first demo versionoutcomes, but gradually ABGF and theGuardian Authority have found the right path.
As a result, the product involves a fast-track decision process, free of paperwork. Theapplicant goes online and applies for cover bysimply stating country, sector, name and thebuyer’s characteristics, as well as requesting acredit limit for the export. ABGF assesses theexporter risk (pre-shipment cover) and/or thebuyer (post-shipment cover) risk, flagging thecredit limit available and a premiumcorresponding to the risk score. This whole
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Building and operatingan MSME export creditinsurance facility in Brazil ABGF has been working on MSME full-range insurance cover aimed at facilitating prospecting and exports to new buyers abroad. Marcelo Franco, CEO at ABGF, explains the new offering and how it was developed. Co-author Pedro Carriço, ABGF´s CreditUnderwriting & International Relations Executive Manager.
Marcelo Franco
process takes an average of five working daysif there is enough information on the buyer’sdata and risk profile. ABGF estimates thatend-to-end processing should takeapproximately 10 days.
MSME feedback goodThe feedback from MSMEs that are in contactwith ABGF experts is highly positive andgives us fresh input to keep improving. So far,the MSME team has processed 338transactions from 130 unique exporters in 22different countries, generating exposure ofapproximately $13 million. As of yet, therehave been no claims filed.
Although ABGF was pushed to launch witha post-shipment only cover, the currentproduct is now closely aligned with initialmarket requests for a complete MSME toolencompassing pre- and post-shipment cover.Eligible enterprises must make no more than$3 million of total export sales yearly and havetotal turnover of up to $30 million. Roughlyspeaking, in this example, 10% of the totalturnover can be insured by the current facility.
Behind the scenes, ABGF had a lot ofpaperwork to do in parallel with the product,such as step-by-step online systeminstructions and the export credit insurancegeneral and particular conditions, as well asthe actuarial and technical paper for pricingand risk assessment mapped to the correctrating. We are very proud of the productrolled out, which we believe meets the needsof both exporters and banks.
We realised however that gatheringtogether even the above-mentioned 23,000MSMEs already registered in officiallycompiled data and educating them aboutexport credit insurance and the technicalitiesof this industry would be a big challenge.
In addition, an online presence would notbe enough to reach the rest of theaddressable market of non-exporter MSMEs.A toolkit, workshops and webinars have arole to play in reaching out to these firms, butthere is still an important hurdle to overcomein the management style and mind-set ofMSMEs to help them access a combination ofinsurance and financing via an online tool.
Education and export coverOur current priority is education on export-related insurance and how to apply for coverfor overseas sales. But for those still outsidethe export business, ABGF has been lookingat partnering with official banks and privateexport representatives, campaigning for more
public information on export facilities.Export and credit insurance promotion is
inherent to ABGF’s mandate and should be aconstant focus of our activities, but we havebeen very careful to avoid undercutting orinterfering with the market. Official supportshould come into play where there is amarket gap or failure. Although a period ofpoor performance might open up space forpublic support, we stick to the philosophy ofnot competing with private insurers.
Since pre-shipment should be an incentivefor export production, ABGF launched aproduct that combines a full working capitalinsurance facility with export credit risk cover.Doubtless there is a market gap in MSMEworking capital cover. Commercial banks arenot willing to provide such a credit linewithout appropriate protection, basicallyrelying on their credit scoring systems and/orrecourse against MSME’s balance sheet. Inmost cases, banks are unable to financeMSMEs without regular guarantees. ABGFhas been studying this market and concludedthat the most efficient cover would be a pre-and/or post-shipment product. Of course,MSMEs served under the official support areexpected to produce and sell abroad.
To that end, ABGF has also been preparinga stand-alone pre-shipment cover, whichshould be launched in the current year sincethe Guardian Authority has already revisedand authorised the product.. The main taskfor ABGF is to educate MSMEs and promotethe official cover around the country, much asit did previously with the post-shipmentproduct.
Furthermore, ABGF has also been lookingat prospecting cover for MSMEs that are keenon exploring to overseas markets but do nothave enough resources to look for businessopportunities abroad. This should bechallenging for MSMEs, and ABGFunderstands that a complete service forthese enterprises should include prospectingas well as pre- and post-shipment cover.
In short, the ABGF team has been workingon an MSME full-range insurance cover aimedat facilitating prospecting and exports to newbuyers abroad. We are convinced that MSMEexport success depends on the facilitiesprovided as well as on the enterprises’production ability and willingness to export. �
*Guardian Authority is the Secretary for InternationalAffairs (SAIN) of the Ministry of Finance as a policymaker which is responsible for the certificate ofguarantee and for hiring ABGF, as fully state-ownedenterprise, to run the export credit guarantee business.
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According to the World Bank’s EconomicComplexity Index, Hungary was the 14th mostcomplex economy in 2015, while according toIMF statistics it was the 57th largest economyin the world with $265.037 billion of annualoutput. The country’s gross domestic product(GDP) totalled $121.72 billion in 2015.
Hungary is clearly an export-orientedmarket economy with a heavy emphasis onforeign trade. It is the world’s 35th largestexporter, selling close to $110 billion overseasin 2015. These exports accounted for 90% ofGDP. It also has a substantial trade surplus of$9.003 billion, of which 79% went to EUmarkets, according to Central StatisticalOffice data.
Hungary’s key foreign trade partners areGermany, Austria, Romania, Slovakia, France,
Italy, Poland and the Czech Republic.Breakdown of Hungarian exports by mainproduct group is as follows: electronicequipment (approximately 20% of totalexports), machines, engines and pumps(18.9%), vehicles (13.9%), pharmaceuticals(4.7%), medical and technical equipment(4.2%), plastics (3.9%), oil (3.5%), rubber
(2.4%), furniture,lighting and signs(1.8%), and iron orsteel products (1.6%).
The EXIMHungary mandateHungarian ExportCredit Insurance andHungarian Export-Import Bank (EXIM
Hungary) is both an insurance company anda bank. The insurance activity of EXIMHungary typically supports short-term dealsthat essentially require export creditinsurance only. EXIM Hungary as a bank alsooccasionally finances medium- to long-term(MLT) transactions based on Organisation forEconomic Co-operation (OECD) rules asbuyer’s credit and tied aid facilities. Althoughtheir value can be higher, the number of thetransactions is significantly lower.
The fact that the structure of globalindustry has dramatically changed over thelast few decades should not be neglected.Consequently, companies do not keepproduction in one country but rather invest inproduction facilities abroad to benefit fromlower labour costs, tax incentives, etc. Thistrend has also resulted in foreign tradetransactions becoming more complex, oftennow requiring the support of multiple ECAs.
Given the relatively small size of Hungary’seconomy and the lack of companies withsufficient scale, many Hungarian companies –and as such EXIM Hungary –cannotparticipate in large-scale transactions alone.A joint approach with international partnershowever provides an opportunity for smallereconomies like Hungary to participate inlarge-scale projects. This may open many14
Berne Union Newsletter, May 2017
EXIM Hungary:Supporting small and largeSmaller ECAs like Hungary EXIM have a key role to play in bothsupporting SMEs and partnering with other ECAs on large scaleproject financings. By Zoltan Urban, CEO EXIM Hungary.
Zoltan Urban
The recently signed deal betweenGeneral Electric, Indonesian powerutility PLN (Perusahaan Listik Negara), EXIM Hungary and ExportDevelopment Canada (EDC) is the bestexample of international cooperationbetween two ECAs.
opportunities in the future for smaller ECAsand EXIM Hungary plans to take advantageof these as much as possible. We trust that asmaller ECA like EXIM Hungary will also havethe chance to play a significant role in alarge-scale transaction, which is a promisingprospect for the future.
The recently signed deal between GeneralElectric, Indonesian power utility PLN(Perusahaan Listik Negara), EXIM Hungaryand Export Development Canada (EDC) isthe best example of international cooperationbetween two ECAs.
PLN’s EXIM Hungary/ECD-backedloanThe overall project value is in excess of $575million, of which $453 million is co-financedby EXIM Hungary (50%) and EDC (50%) witha 12-year loan. The transaction includes theinstallation of eight General Electric mobilepower plants in regions with lowelectrification rates in Indonesia. As a result,the installed capacity has been increased by500 MW, meaning that electricity will bedelivered to approximately 4 millionIndonesian homes. This project alsocontributes to the Indonesian government’sgoal of installing 35GW of new powercapacity by 2019, which will result in a 99.7 %electrification ratio in the country.
The deal proves that Hungary plays animportant role in the global value chain of theenergy sector, and that EXIM Hungary, withits biggest ever participation as co-lenderwith EDC, is strengthening its presence ininternational export financing markets.
This deal is not only beneficial forHungary’s export relations but for its nationaleconomy as well. The exports generated bythis deal are worth more than $276 million,and it directly and indirectly adds more thanHUF27.21 billion to Hungary’s GDP.
With this deal, EXIM Hungary has proventhat a small economy is able to compete withmore developed economies and provide anadequate level of service. To furtheraccelerate Hungary’s export activity in thefuture, EXIM Hungary plans to participate insimilar projects with domestic companiesand, as a result, enhance the internationalcompetitiveness of Hungarian exporters witha special focus on SMEs. To help thesecompanies succeed in their export activity,financing would be provided by EXIMHungary up to the proportion of theHungarian content of the given projects.
Due to global changes, we believe that therole of smaller ECAs can increase in thefuture and we trust that a key factor in oursuccess will be developing our internationalnetwork and building new relationships. �
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Creating a competitive edge for Hungarian exporters
International Union of Credit & Investment Insurers1st Floor · 27-29 Cursitor Street · London · EC4A 1LT · United Kingdom
