As any would-be mountain climber knows, taking risks is much easier when you have a safety net. Amid increasing geopolitical risk and rising economic volatility, credit insurance acts as that safety net, facilitating trade and investment across global commodity markets in emerging and developed economies alike.

At the inaugural TFG Geneva conference in Geneva, Switzerland, Trade Finance Global (TFG) spoke to Aaron Bailey, Global Energy and Commodities (GEC) Group Leader – Credit Specialities at Marsh, to learn more about how the insurance industry is supporting trade in emerging markets. 

“Emerging” markets… for some

While in some sectors emerging markets are seen as new frontiers, ripe with unprecedented risks and opportunities, the commodities sphere has been operating in this area for years. 

“Commodity houses wouldn’t be where they are today without the emerging markets as upstream materials are generally sourced in those regions, whether you’re looking at agri in South America, oil and gas in West Africa, or metals in the Democratic Republic of the Congo,” said Bailey. 30% of the world’s minerals are in Africa, while the world’s largest oil reserves currently lie in Venezuela.

Where commodity traders go, so do insurers. Credit insurers have been operating in emerging markets for years, underpinning commodity trade and trade finance operations in resource-rich regions. The insurance market is “a fundamental lever and support tool to facilitate that trade,” said Bailey, enabling investment that may otherwise be passed on as too risky.

The continued presence of credit insurers has translated into a deep understanding of each emerging market, with all its unique quirks, risks, and opportunities. The people on the ground, who have often been working in a country for decades, will often have dealt with common issues and are perfectly placed to evaluate risks and credit decisions.

Marsh operates in a broad range of markets across the agricultural, metals, and energy spaces. “Anywhere where our clients are, we are – whether that’s a developed market or an emerging market,” said Bailey.

Not-so-shocking shocks

Despite the unprecedented uncertainty brought by the current geopolitical environment, material losses to the market have been minimal, said Bailey. Commodities houses and logistics companies are sophisticated actors who have seen their fair share of disruption and are well adept at handling them. Even if the circumstances of trade fluctuate, the basic motivation – people in one place needing resources that are only present in another place – stays the same, so commodities trade will keep powering on.

“With the increase of tariffs and resource protectionism, we’re seeing trade flows move and alter depending on where you are and what asset class you work in – but trade continues to flow: The commodity world is fundamental to the global economy,” said Bailey.

That doesn’t mean that risks aren’t present or worth monitoring. Marsh’s World Risk Review tool uses a number of factors, like a country’s investment, political, and credit environment, to determine a country’s risk rating and counterparty risk level. This enables investors and insurers to make informed decisions about the risks they take on and countries they expand into – which is all the more crucial when it comes to emerging economies.

Example of the quantitative risk scoring in Marsh’s World Risk Review tool. Source: Marsh

The green transition is a transition

Especially with the COP climate conference drawing nearer, the issue of environmental, social, and governance (ESG) factors in emerging countries is a delicate one. The developed world, which has long relied on hydrocarbons for growth, is now the best-placed to invest in renewable energy, while emerging economies are lagging behind.

“The keyword here is transition: ESG is a transition, it’s a process. Where the insurance market comes in is to proactively deploy their capacity to finance renewable projects, but also supporting that transition,” said Bailey. This can mean, for example, supporting traders that have an ESG strategy and are shifting away from fossil fuels but aren’t fully carbon-neutral yet.

“If we look at China and their demand for liquified natural gas (LNG) as a transition fuel versus coal, that is a transition. Is it fully clean energy? No, but it’s part of that process, and it’s incumbent upon us to support them along that journey,” said Bailey.

Recent volatility in the global energy market, especially following Russia’s invasion of Ukraine and the 2022 Nord Stream pipeline blast, has placed energy security back at the forefront of energy policy. 

“This has driven an element of rollback on ESG because ultimately we need to get power and energy to our economies – but that doesn’t negate the importance of ESG,” said Bailey. Rather, it is temporarily taking a back seat as global energy markets recalibrate and countries act to secure their energy flows.

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Looking forward, an increasingly crowded credit and political risk insurance market must work together to secure the future of commodities trade. As new risks emerge at a breakneck pace and markets become more fragmented, cooperation is essential. 

This often looks like a multilateral collaboration between insurers, financial institutions, traders, and brokers, working together to unlock development in emerging markets.

Capital markets must “coordinate with one another, share experiences and insights to help facilitate trading investment. And ultimately, that will benefit both our clients and globally the economy,” said Bailey.