Export Credit Agencies and Credit Insurers working closely with governments have created stability for the global market in recent years. With recent regulatory changes, current high sovereign debt levels and rising political risk levels, however, there are increasing opportunities as well as threats for credit insurers, as governments gradually push more risk to underwriters leaving them with greater exposure levels and potential risk from future systemic events. We caught up with Robert Nijhout, from ICISA, about the trends in the surety bond markets and the technological changes in the trade landscape.
Featuring: Robert Nijhout, Executive Director, International Credit Insurance & Surety Association
Host: Deepesh Patel, Editor, Trade Finance Global
Thank you very much for joining us on Trade Finance Talks TV.
So, Robert, can you give us a quick introduction? Who are you? Where are you from and what do you do?
My name is Robert Nijhout. I work for the International Credit Insurance & Surety Association, better known as ICISA. We represent the trade credit insurance industry and the surety bond industry and ICISA has been around for over 90 years. We were the first Association in this in this area back in 1928. And our members represent over 95% of the private market and trade credit insurance; it’s a pretty representative group. And on the surety side, we’re proud to have the largest surety companies such as the Travellers, Chubb, Liberty Mutual, Soul Guarantee.
Introduction to Trade Credit Insurance and Surety Bonds
Great. So for our listeners, could you give us an overview of what trade credit insurance is and what surety bonds are.
Trade credit insurance is basically a non-payment insurance. So it ensures the risk of you not getting your money on the due date of the invoice. It gives the traders the advantage of selling off credit, and therefore have a competitive advantage of those that sell against cash or prepayment, which is the usual approach if you don’t have insurance, surety bonds perform or guarantee the performance of a third party. So it’s you very popular in construction for instance when construction firms go down if you have a surety bond, the bond not only pays for your damages, but it also looks for another construction company to finish the job for you. So it’s a very welcome product, particularly when public funds are involved. So Governments use a lot of surety bonds.
And what are the key changes? Have you seen an appetite from an insurance perspective in 2019?
Not so much 2019 as a year because these trends go slowly, usually. What we see over the last year or two, I suppose is a high increase in insolvencies around the world, particularly in Europe and in North America. That hasn’t really dented the appetite, but it has maybe made underwriters more cautious. Also, the companies, that I represent are very much subject to what we call KYC. Know your debtor, there’s much more scrutiny on who we are ensuring. This is also linked to an increase in fraud that we see over the years, fraud has become very sophisticated and we are better at detecting it. But we also see that it’s much more prevalent than it used to be. So these are all areas where one could expect a lesser appetite. But at the same time, the market is highly competitive, pre average premium rates are still going down, there is more capacity in the market that is needed to, in my humble opinion. So there’s plenty to shop around for clients that are looking for cover.
Digitalization of Credit Insurance
What are underwriters doing right now to meet the ever-increasing demands of their clients? And are you seeing any innovations within the trade credit insurance market?
Absolutely. I think one of the main concerns of clients over the years has been the ability of credit insurance to pull cover that doesn’t work retrospectively of course. But for future trade and that makes the traders uncertain and also finances involved in the trade uncertain. So as a sponsor, that you now see, what we call non-cancelable limits, which are guaranteed cover for an agreed period of time usually up to a year. Not available on everything and for everyone, but it is certainly meeting that demand. There’s a lot more going online. What used to be a manual, physical job is now very much automated, brings costs down and makes it more real-time efficient. We’re also subject to platformization as all sectors. So we see a lot of platforms arising where capacity is either offered or being asked and so, parties find each other on that on that platform. Blockchain is applied in various areas, not just on these platforms for capacity, but also in other areas. Also, on the surety side, we see blockchain being applied more and more. In harbours and in other areas where there’s a fixed group of traders and third parties that are involved if you like.
Regulatory Overview of Trade Credit Insurance
Great, and how is regulation changing the market? And what are your expectations for 2020 and perhaps taking a five-year view?
That’s probably our most challenging bit for our industry, I think for everybody, but especially for us. We are a small industry as credit insures and also surety bonds. So we are lumped together with the larger insurance sector for whom this regulation is usually drafted and it doesn’t really apply or work well for us. So we have a very big job in creating awareness with regulators and trying to get accommodation of our specific requirements. I’ll name you a couple of things. In Europe, it’s Solvency II and the capital requirements for insurance companies to make sure that there’s money in the bank when claims have to be paid. So we are all in favour of Solvency II and we think it’s a great regime, but it’s a very high level and very generalised. If you like. For our line of business that we are part of, and we are constantly working with regulators on trying to get more recognition for the specific needs of credit insurance. There’s a review for 2020 of Solvency II so we are very closely involved with our regulatory partners to see where our wishes and our hopes can be accommodated. Basel Rules are another one that affects financing. It’s not just us we’re affected by them, of course. I think overall, sustainability is a new one that comes across. Our members need to show that they are compliant with sustainable goals. UN sustainability goals are used often as a benchmark in this regard. So they’re all welcome developments. And it’s not that we don’t like that. I think there’s general support for these but they have to be done in a way that our clients don’t suffer much and that we are still able to offer the products that we want to offer. So there’s more work to be done there. It’s not bad as I said, but it keeps us on our toes. And it’s more fine-tuning. But the good thing about it is it that makes the industry more transparent, more reliable. I think at the end of the day that is what everybody wants.
Robert, thank you very much for joining us and giving us an overview of both ICISA and also some of the key trends that are going on in the insurance and the surety market.
Thank you for inviting me.