Postmodernism in Trade Credit Insurance

Aon UK Limited is authorised and regulated by the Financial Conduct Authority

Postmodernism in Trade Credit Insurance

The beginning of the end or the end of the beginning?

ICTF – October 2013

Stephen Taylor, Executive Client DirectorAon Trade Creditt: +44 (0) 207 086 1631 | m: +44 (0) 773 0193356e: [email protected] | thehub.aon.co.uk

mailto:[email protected]

http://www.thehub.aon.co.uk/

2

Agenda

A quick recap – What is credit insurance?– Benefits– Why credit insurance matters?

Beginning of the end?– UK perspective– Impact of credit crisis– How the credit insurance industry has adapted?

End of the beginning?– Global perspective– Practical credit management solutions– Future predictions

Aon Risk Solutions | Global & Specialty Clients | Trade Credit

A quick recap.....what is traditional credit insurance?

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Seller Buyer

Credit insurer

Insure credit risk

Payment for goods / services

Goods / services on credit terms

Pre

miu

m

Insurance

Bank

Advance payment

Ben

efic

iary

Protects the “debtor” asset Insures against non-payment (credit &

political risks) by the debtor i.e. bad debts Relates to B2B transactions Trade related (not a financial guarantee) Covers domestic sales & exports Purchased by SMEs, corporates,

multinationals Discretionary purchase Different policy structures, .e.g. ground up,

top account, catastrophe Purchasing drivers vary for each business


Bank involvement where financing

A quick recap.....the benefits

4

Protects from bad debt

Risk prevention

- Identifies and avoids expected losses- Greater insight into customer’s likelihood

to default

Enhances working capital

- Facilitates access to improved financing- Balance sheet engineering- Additional banking lines

Embeds credit management disciplines

- Enables companies to extend credit terms- Reinforces credit management- Access to credit risk expertise and

analysis

Helps grow your business

- Supports mergers and acquisitions- Promotes sales growth whilst maintaining

credit management controls- Directs and supports sales to higher

margin markets

Risk transfer

- Transfers credit risk to insurer’s balance sheet

- Reduces bad debt provision


Global market share – why credit insurance matters!

5

Source: ICISA

34%

24%

21%

3%2%

16%

Euler Hermes Coface Atradius/CyC AIG QBE Other

Globally trade credit insurance covers nearly €2tn of commercial exposures

Equivalent to 15% of global business receivables on credit terms


6

Current dynamics – impact on credit insurance? Economic & Political

– US debt ceiling – sorted for now! – Japan – stimulus package– Government debt levels – how long can these keep increasing?– Low interest rate environment – Political Risks, e.g. Egypt

Financial Institutions– Impact of Basel III – Increase in demand for less conditional credit insurance products

Solvency II– How will this impact insurers – capital allocation and pricing?

Social Media– How to manage the information flow?



The beginning of the end?

8

A question of perspective – UK statistics

Year Number of policies Average premium rate Insured turnover (£M)

2002 12,355 0.16% 203,239

2003 10,413 0.16% 192,204

2004 9,811 0.16% 198,939

2005 11,202 0.14% 222,250

2006 12,504 0.13% 258,076

2007 13,708 0.12% 281,986

2008 14,086 0.11% 302,511

2009 11,430 0.13% 269,969

2010 10,177 0.14% 240,072

2011 10,202 0.10% 312,737

2012 10,550 0.11% 300,655

(Source ABI)


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Observations – UK market

2002 to 2012:– Policies purchased down 15%– Average premium rates down 30%– Business insured increased by 48%– Total premium relatively flat over period


1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

50

100

150

200

250

300

350

400

£m

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2008 Credit Crisis – credit insurance hits the news!


"Credit insurance takes centre stage" – Financial Times Oct 2008

"Companies feel chill as trade credit insurance dries up" – Financial Times Nov 2008

“Trade credit insurance withdrawal bites” – The Telegraph Nov 2008

"Blow as credit insurer halts cover" – The Independent - June 2008

“Woolworths hit by credit insurance withdrawal” – UK business news Oct 2008

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2008 - Client Experience


Credit limit cancellations and reductions

Increased rates and tighter commercial terms

Claims under greater scrutiny

Impact on the insurer market

Business model unable to respond to economic storm

Claims haemorrhaging

Capacity and appetite reduced

Rebalancing of exposure/premium ratio

More stringent risk underwriting model and greater sector weighting

“Survival” rather than growth objectives

Increase in rates by circa 40%

Government involvement

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2008 – common comments from clients

“The umbrella is taken away when it rains! – Insurer withdraws cover at a key time”

“The insurer doesn’t provide a notice period prior to withdrawing cover”

“I will pay more for additional capacity”

“Cover is expensive”

“Will claims be paid?”

How did insurers adapt?

13Aon Risk Solutions | Global & Specialty Clients | Trade Credit

2013 solutions – how credit insurance market has improved

“The umbrella is taken away when it rains! – Insurer withdraws cover at a key time”

Growth in XoL ‘non cancellable’ credit insurance product– 2008:

• Ace, AIG, Atradius Special Products• Others where small number of endorsed limits

– 2013• Ace, AIG, Atradius Special Products, Equinox, Euler Hermes, Markel, QBE, XL• Others where small number of endorsed limits



The insurer doesn’t provide a notice period prior to withdrawing cover”

Notice period on credit limit changes– 2008:

• No notice period unless specifically negotiated.

– 2013: Delayed effect / grace clauses• Atradius: 30 days+• Euler Hermes: 30 days+• Coface: 30 days+

– How much further will notice periods increase?



“I will pay more for additional capacity”

Top-up Cover– 2008:

• “limit plus” from Aon• Other insurers – selective basis

– 2013: • Coface “Top Liner”• Euler (CAP)• Atradius • “limit plus” from Aon• Other insurers – selective basis



“Will claims be paid?”

– The market has paid claims...for example:• Schlecker• Game• Centrotherm• Petroplus• Ukraine/Kazakhstan Banks• Korea Line• Libya

– Claim payment response times have improved



“Cover is expensive”

– Increase in market capacity. – Softer market

• average premium rate 0.11% (2012) versus 0.13% (2006) (UK)• BUT, price is only one aspect

• Key is the value proposition


Trade credit insurance – value proposition

Value to the Insured


Cost 100

Information

10

19




Cost 100

Information

10

Sales20

20




Cost 100

Information

10

Sales20

Cover20

21




Cost 100

Information

10

Sales20

Cover20

Finance100

22

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2013 - Credit Insurance

– Credit management view of trade credit insurance changed?• More focus on value of product• Additional investment in risk information/systems• New solutions used to manage credit and political risk• Captives utilised where appropriate

– Insurer model improved• Balance sheets survived the crisis• Reinsurance position positive• Total Potential Exposure more closely reflects actual

insured business• High quality of risk information held • Better value proposition



The end of the beginning!!!!

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2013 - Observations

Global credit insurance market is growing Purchaser behaviour is more sophisticated Insurer product offering is improving


Broker role changing Technical knowledge and service important Risk advisory/consultative

Integrated Credit, Political Risks and Surety offering

Credit, Political Risks & Surety: Product Overview


Dem

and

Low

Med

ium

Hig

h

Supply - Market Capacity

Low Medium High

Supply Bonds

Financial Guarantee

Single Risk & Syndication

FI - Structured Trade Credit

Deferred Consideration

Mark to Market

Multi Debtor Ground Up

Multi Debtor – XoL

Performance Bonds

Top Up

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Subjective: demand / supply side will move depending on the risks/geographical location

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Practical credit management solutions

Scenarios– Insured doesn’t want to rely on insurer credit limits – ‘tail wagging the dog’

– Insured only worried about concentration risk

– Insured wants to include Insurer risk information within credit management model

– Opportunity to increase sales with the buyer, but the buyer doesn’t want to increase collateral

– Insured wants to improve financing:• Trade Finance• Financial Institution use of product


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Self underwritten programme

The problem: Insured doesn’t want to rely on insurer credit limits ‘tail wagging the dog’

– Large multinational – European sales– Client wanted greater autonomy setting credit limits– Sophisticated credit management– Good visibility of customers financial strength

The solution:– Self underwritten programme - full autonomy in the Insured’s credit management– XoL structure -100% cover sitting in excess of bad debt provision/captive


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Single risk & syndication

The Problem: Insured only worried about concentration risk in portfolio– Global company– Client worried about impact of bad debt on share price – £100million exposure on single automotive risk

The Solution:– Syndicated Single Risk– 5 insurers– Claims co-operation agreement– Non-payment Cover - 90% Indemnity– Cost of insurance transferred to the Obligor via a finance charge


Top Account

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Covers key exposures, to which real catastrophe risk attaches.

It is ideal for companies that have no requirement to insure its entire ledger, yet wish to cover its largest strategic buyers.

Covered top accounts must be named buyers and a valid credit limit must be in place. A claim can be payable for the whole loss amount – above the first loss level.If it is a top-trader, limits must be applied for on all exposures above a pre-agreed level

Individual losses over policy period

Uncovered account Covered “top” account

First loss level

Series1

0

20000

40000

60000

80000

100000

120000

140000

160000

Top account levelAon Risk Solutions | Global & Specialty Clients | Trade Credit

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Risk Intelligence

The problem: insured wants to include Insurer risk information within credit management model– Global company - telecoms– Investment in credit management model– Wanted to benefit from ‘live’ risk intelligence– Did not want to purchase insurance

The Solution:– A few potential solutions:

1. Insurer risk information only2. Independent credit management software company3. Aon Trade Manager

– Helps with debtor analysis, portfolio management and data transparency– Helps reduce DSO– Risk concentration more accurately identified

• Insurance purchased selectively


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Supply Bond: helping the buyer increase sales!

The problem: opportunity to increase sales with the buyer, but the buyer doesn’t want to increase collateral.

– Retail sector. £10million current exposure secured by Letter of Credit– Opportunity to increase to £30million– Buyer did not want to provide an increased Letter of Credit, due to impact on its financing

facilities

The solution:– Surety markets used to issue a supply bond– On demand bond– Buyer’s finance facilities improved– Increased Sales– Niche solution

Could also use credit insurance, if conditional wording accepted


Trade Finance

33Aon Risk Solutions | Global and Specialty Clients | Trade Credit

Buyers

Seller

Credit Insurance(90% to 100%)

Collection account

Bank

Payments

SalesReceivablesInvoicing

Bank purchases AR from seller for up to 100% of face value

Seller pays interest monthlyin arrears based on daily LIBOR

Join

t ins

ured

Join

t ins

ured

Invoice discounting process

Insured wants to improve financing:

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Financial Institutions: use of product

Credit Insurance is used to support a number of areas:

– Supply Chain Finance

– Trade Finance

– Export Finance

– Revolving Credit Facilities

– Acquisition Finance

– Bonds

How can non-payment insurance be used to help your company’s financing?


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Future Predictions


– Improved Insurer model to weather the next economic downturn

– Globally multi-debtor and XoL markets will grow

– Geographical hot spots

– Single Risk & Syndication will become more important

– Financial Institutions use of product will increase

– Use of risk intelligence products will increase

– Broker expertise, innovation and approach important


Thank you for listening

Stephen Taylor, Executive Client DirectorAon Trade Credit t: +44 (0) 207 086 1631 | m: +44 (0) 773 0193356e: [email protected] | thehub.aon.co.uk

mailto:[email protected]

http://www.thehub.aon.co.uk/

Documents

Postmodernism in Trade Credit Insurance