The world of credit insurance has seen a multitude of fluctuations in the market, as of late. Whether it be, COVID-19, geopolitical instability, or inflation, these factors have significantly impacted the sector, lowering the appetite for risk.
Ahead of ICISA’s Trade Credit Insurance Week, Trade Finance Global’s (TFG’s) Annie Kovacevic (AK) spoke to Paul Wollny (PW), chief executive officer at the Luxembourg-based GreenStars, a highly specialised credit and surety insurer, to learn specifics about the industry.
Wollny said, “It’s an amazing world! Every time I accept a new assignment, I am puzzled by how different a view can be on a simple thing like credit risk. Every stakeholder can add value depending on where they stand in the market.”
AK: Could you tell us more about GreenStars?
PW: In terms of tenors, GreenStars has a well-diversified portfolio from short-term transactions to long-term credits. The variation allows for a large scope, but what matters most is that the tenor fits the purpose of the insured credit.
This being said, sovereign risks do not play a significant role for GreenStars.
GreenStars are highly diversified in terms of both regions covered and the different types of credit and financing offered.
AK: GreenStars focuses on single credit insurance, could you tell us more about what that entails––do you have a use case?
PW: Unlike traditional commercial credit insurance, we do generally cover name by name. Notably, there has been a recent shift to embrace these types of portfolios in order to gain efficiency.
A typical insured transaction could be a bank-to-bank loan which enables the obligor to finance the import of goods. This, in turn, would be used to produce export goods.
But the insured transaction could also be an unsecured loan. In case of a default, the bank will typically try to recover the insured credit before claiming on the unpaid insured part of the loan.
The current market has seen a steep decrease in risk, on a global scale. More and more, we are seeing banks retracting their backing, often disproportionately affecting small- and medium-sized (SME) businesses whose risk does not match their reward.
AK: How has the appetite for commercial and political risk been affected by COVID-19, the Russia-Ukraine conflict, and inflation?
PW: At the beginning of the COVID-19 pandemic, we expected an increase in claims, which, so far has not come to pass.
Nevertheless, we have continued with a selective underwriting approach and benefitted from a very conservative and particular growth strategy for the insured.
GreenStars has been fortunate not to experience any knock-on effects as a result of the current Russia-Ukraine conflict. Unfortunately, however, there has been some needed monitoring of the market concerning the effects of the COVID-19 pandemic.
GreenStars considers its managing of a balanced portfolio and close monitoring of selection processes beneficial to our balance sheet and reinsurers.
Therefore, GreenStars has managed to maintain a strong buffer to weather any potential damage to the structure.
AK: Leading on from this…we have seen a lot of banks retreating up the credit curve. Focus has shifted to providing insurance solely for ‘AAA’ businesses, disregarding ‘B-’businesses. What can be done?
PW: The market has seen a trend whereby traditional commercial trade credit insurers have maintained a certain reflex to the situation, however, this method is not mirrored by GreenStars.
As I said in the beginning, there are a broad variety of approaches to credit risk.
GreenStars started with insuring against the default of bank loans for obligors with a very low or no rating at all. Here, the key success factor was the quality of the structure and, more aptly, the experience of the insured party to manage complex sophisticated systems.
We have excellent experience in supporting new bank activities at the earliest stage possible. Here, it is very important to select the right partner and ensure the underwriting team’s robust understanding of new developments.
Often, the perception of risk is worse than the reality. To give you an example, like many others, we were sceptical about insuring revolving credit (RC) lines. However, the reward in this instance outweighed the risk.
Despite this current phenomenon, it was not always like this. During the COVID-19 crisis, we saw the opposite. In our portfolio, RC lines were used on a very low level.
During the peak of the crisis, the RC use increased by 50%––still far below 50% of the maximum committed amount, thus allowing for a significant margin of safety. Today, however, utilisation is back to normal.
The explanation is quite simple: if the insured party concentrates on the strongest market participants, there is a good chance that they will survive a crisis, especially if they are an essential part of the local industry. A committed RC line will make these market participants even stronger.
For GreenStars, the COVID-19 crisis turned out to be an opportunity rather than a concern. Even in a worst-case scenario, the additional premium would have created enough buffer for absorbing the default of one obligor even if fully drawn.
Having said that, we also note that it can be attractive to strive for risks with a better rating on which we expect to see increased premiums.
AK: Given the stark changes in the market, how have customer relationships evolved?
PW: It is part of our DNA to support innovation. As credit insurers, we should be conscious that those insured are closer to the risk, and therefore have a better understanding of all nuanced elements.
In order to accommodate clients and minimise the risk of ‘anti-selection’ insurers can protect themselves by being prepared to constantly learn, ensuring that they have robust processes in place. In turn, this will solidify win-win outcomes.
In addition, the better you know the insured company, the better you can benefit from the expertise of the insured––provided there is a sufficient level of transparency. In this respect, we have noticed that banks especially have developed a better understanding of this need, becoming more open over the years.
PW: We have strengthened our underwriting team which is dealing with a large range of products.
Despite this bolstering, it is still an expectation for insured parties to be better versed in associated risks.
Keeping this in mind moving forward will substantially help all customer relationships.
PW: Well, credit and bond insurance is a niche activity for most insurers and reinsurers. So, capacity depends upon external developments––that is, outside of this insurance class. By nature, this creates some uncertainty.
During the last few years, the industry has shown excellent results and robust resilience against adverse economic challenges. This has been proven in past events; the market expected dramatic loss ratio increases throughout the COVID-19 crisis, but nevertheless prevailed.
Let’s continue on this path!
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