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Season 1, Episode 75

HostDeepesh Patel, Editor, Trade Finance Global

Featuring: Richard Wulff, Executive Director, ICISA

Like many products within trade finance, trade credit insurance has endured serious volatility during the last 12-18 months, thanks to the COVID-19 pandemic.

But while some products have struggled to bounce back – as evidenced by the growing trade finance gap – trade credit insurance has ultimately emerged from the pandemic stronger than before. 

And perhaps one of the best witnesses to that recovery is Richard Wulff, executive director of the International Credit Insurance & Surety Association (ICISA), 

After joining ICISA in January this year, Wulff now occupies one of the most senior positions in the world of private credit insurers, sureties, and their reinsurers.

Founded in 1928, ICISA’s current members now account for over 95% of the world’s private credit insurance business, and with almost $3 trillion in trade receivables insured and billions of dollars worth of construction, services, and infrastructure guaranteed, ICISA members play a central role in facilitating trade and economic development worldwide.

As Wulff told Trade Finance Global (TFG) at ExCred International last week, ICISA fulfils three main roles:

“We advocate on behalf of our members; we talk to the press to make our product better known in the world; and we get together with our members to spread best practices.”

Pandemic ups and downs in trade credit insurance

Looking back on the pandemic, Wulff said the experience of trade credit insurance can be described as a U-shaped recovery, with no change in appetite from market participants once conditions were more certain.

When the pandemic struck in the beginning of 2020, people didn’t know what to expect,” he said, “and the natural reaction of corporates and insurers in general was to see how they can limit their risk, how they can limit their exposure to such a big event like a pandemic. 

“With the progression of the pandemic, what we saw is capacity shrinking – probably up to July and August of 2020 – and people getting used to the idea and seeing more clearly what the pandemic repercussions would be for businesses.

“And by the end of September 2021, that capacity was larger than it was at the end of 2019. So yes, the pandemic did have an impact, but that impact has largely been negated.”

Loss payees during the pandemic

Another issue that the pandemic has shined a light on is the role of the loss payee in an insurance policy.

Wulff notes that, during the pandemic, the importance of ‘know your policy’ principles were highlighted once again, amid widespread claims and other uncertainties. 

Putting himself in the shoes of one such loss payee, Wulff said it is important to think of these insurance policies in the same terms as one would when buying a car.

“I think of myself buying a car, and I think, what does the car do?” he said. “Does it go fast? Does it go far? Does it protect me when things go wrong for a loss payee to an insurance policy? It’s exactly the same. 

“The loss payee wants to know what the policy protects them against, which conditions there are under that policy to actually get indemnification, and that’s what you buy the policy for. 

“So I expect the loss payee would go deep inside the policy, and would get people who can explain the policy to them.”

Wulff added that brokers play an important role in this process as the loss payee, and will explain exactly what the policy in question can offer. 

“So when the unexpected and the unwanted happens, nobody has a surprise,” said Wulff. 

“Everyone knows exactly how the policy will behave, when the money will hit the bank account of the loss payee, and that’s just about the minimum people need to understand.” 

However, Wulff notes that, in the supply chain business – where there are more parties to a transaction – the pandemic revealed that some loss payees were unfamiliar with their policies.

Default rates – the crisis that never was

One of the purposes of trade credit is to mitigate default risk, and one may have thought the pandemic brought with it a much higher and broader default risk throughout economies and supply chains.

However, as Wulff points out, the pandemic hasn’t really caused a surge in default rates in the UK and EU, due mainly to the unprecedented stimulus packages offered by governments. 

“What we have seen throughout the pandemic, especially in economies where the government intervened quite heavily in the real economy, is that default rates were extremely low,” said Wulff. 

“Nobody had expected this, but with things like furlough schemes and credit guarantee from the government, those default rates were not very high, even though there were companies that did go into insolvency. 

“And the credit insurance policies did what they were supposed to do: they reacted to it, they paid out when the risk could no longer pay its bills, and that’s exactly the promise that the credit insurer sold to the policyholder at the beginning.”

In addition, governments also offered state support schemes for credit insurance, which Wulff describes as the other element of the ‘belt and braces’ formula used by governments to stabilise their economies.

Those state support schemes were aimed at those credit insurers to pass on to their policyholders,” he said. 

“What governments basically said is we will provide you with a blanket reassurance over your book so you don’t get hit too hard.”

Beyond stimulus

Wulff spoke highly of each of these government interventions during the pandemic, with the net result that the certainty of market participants was greatly increased when it was needed most.

“That insecurity around how the economy is going to perform and how it will hit me and my finances – that was taken away by those governments,” said Wulff. 

“After the summer of 2020, this indeed did stabilise the economy, and what you saw is that people became much more optimistic.

“The picture was much more clear, people knew what to expect, and there were no big supply chain disruptions in a financial sense.”

Wulff’s only suggestion for next time – if necessary – is that interventions in trade credit insurance be shorter and more targeted, since these stimulated the economy as a whole, covering sectors that did need stimulus – such as hospitality and travel – but also covering those which did not need stimulus, such as e-commerce.

CPRI Tips

Priorities in 2022

Having joined ICISA in January 2021, Wulff said he is excited to start making a difference to the regulatory nature of the trade credit insurance and surety business, which he sees as one of ICISA’s main goals.

“My priorities are described in the statutes of ICISA,” said Wulff. “It’s advocacy, it’s public relations work, and it’s the spreading of best practices.”

In order to achieve those priorities, one of the main projects that ICISA is working on for 2022 is a data-gathering exercise aimed at quantifying the trade credit insurance market and adjourning markets.

“On a very simple level, people argue about how big the trade credit insurance market is,” said Wulff. 

“Some people say it’s about $8 billion, others say it’s about $11 billion, and then you’ve got a third person who sticks his finger in the air and says no, it’s $15 billion.” 

By gathering more data, ICISA hopes to quantify not only premium volumes, but also losses and volatility, which Wulff believes will demonstrate how important trade credit insurance is to the global economy.