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In an era of rapid transformation within the global trade finance market, the role of insurance has emerged as a critical cornerstone, providing a safety net for businesses engaged in international trade.
As regulatory pressures mount for banks, insurance is stepping into the spotlight to mitigate risks and foster trust among trading partners.
To delve into the intricacies of this evolving landscape, Trade Finance Global (TFG) spoke with David Quehenberger, Trade Finance Lead Underwriter Portfolio Solutions at Swiss Re Corporate Solutions.
Parallels between insurance and parenting
Insurance is a safeguard against unforeseen challenges, particularly in an era marked by increased global economic interconnection. There are parallels between the protective instincts of parents and the insurance industry’s aim to shield clients from the impact of adverse events.
Quehenberger, himself a new parent, said, “If a child breaks their favourite toy, you are there to step in and replace it with a new one. But you also want to be sure that the little one is not playing with things that are too expensive or doing things that are too risky.”
This analogy highlights the importance of a close relationship between the insured and the insurer, reflecting the need for a deep understanding of the client’s operations to effectively mitigate risks.
Quehenberger added, “As a parent, you need to have a deep understanding of what your child is doing and what is happening. That is similar to what we try to do in the business context, to have this close relationship.”
Maintaining these close relationships comes with a responsibility to have a pulse on changing needs and demands in the market from various relevant stakeholders, including banks.
Meeting the changing needs of banks
The insurance industry is likely to adopt several strategies to meet the changing needs and expectations of banks in the evolving trade finance landscape.
One key strategy involves aligning offerings with regulatory requirements, specifically focusing on Capital Requirements Regulation (CRR) compliance. Insurers are expected to develop CRR-compliant wordings and solutions, catering to banks’ need for relief from regulatory capital burdens.
Quehenberger said, “We have seen big developments in terms of wording and there is now mostly a consensus on what exclusions are allowed and what exclusions do not work under the CRR framework. That is just something that you have to be mindful of as an insurer.”
Additionally, insurers will likely enhance their capabilities in automated underwriting and portfolio monitoring, leveraging algorithms and advanced tools to provide faster and more accurate assessments.
Collaboration will also become more prevalent, with insurers exploring co-insurance structures to accommodate banks’ desire for larger capacity.
Lastly, staying closely connected to regulatory developments and participating in advocating efforts, such as those through insurance panels, will be crucial to adapting strategies as the landscape evolves.
These strategies collectively demonstrate the insurance industry’s commitment to addressing changing needs and expectations while maintaining a competitive edge in the trade finance market.
Whole turnover insurers in the market
It is little secret that insurance is a competitive market.
Quehenberger said, “The market is almost crowded, particularly on investment grade risks. Whole turnover insurers, however, are in a category of their own, given the huge databases they have built up over time, and their capabilities in automated limit-setting or credit assessment. They are the ones who can do those huge granular portfolios with thousands of buyers or can write SME portfolios efficiently.”
However, this is not the section of the market that Swiss Re’s trade finance team differentiates itself in, preferring instead to cater to specialised market needs. They emphasise providing bespoke portfolio solutions, leveraging algorithms, data analytics and close insured partnerships. This includes offering CRR-compliant wordings and targeting large ticket sizes on individual risks they are comfortable with.
Additionally, Swiss Re’s AA minus rating from Standard & Poor’s Ratings Group is highlighted as a unique differentiating factor, offering much improved RWA savings to banks compared to insurance from lower-rated carriers. Swiss Re sees value in addressing market demands that may have been a secondary focus for whole turnover insurers, positioning itself strategically to serve areas requiring different insurance solutions.
A digital dawn for trade finance insurance
While digital innovation has rapidly reshaped parts of the trade finance sector, distribution in the secondary market – which includes insurance – seems to be lagging behind in terms of practical digitalisation. Yet, there are clear opportunities for technology to play a key role in the future of the space.
Quehenberger said, “Everybody was expecting digitalisation to move a lot faster, especially when it comes to platforms, which is not something that has taken off, even as we remain interested and are talking to brokers and platform providers on potential partnerships. But there are other areas where I see advancements that are really exciting.”
Automated underwriting and algorithm-supported decision-making can expedite the assessment process, an approach Swiss Re is already using very successfully as part of their own offering for FI risks submitted on their client portal. Advanced portfolio monitoring tools offer real-time insights into portfolio health and customised solutions tailored to clients’ needs can be developed using sophisticated risk assessment models.
These innovations collectively hold the promise of streamlining processes, enhancing risk management, and fostering greater collaboration in the trade finance insurance landscape.
The long-term nature of these technological projects implies a need to continue to attract and develop the next generation of top talent into the space.
Guiding the next generation
For young individuals considering a career in the trade finance and insurance sector, the industry is an exciting blend of finance and economics with a practical, hands-on approach.
Quehenberger said, “Trade finance, at the end of the day, is a finance job. You have to like finance, and you have to like economics. It’s a very hands-on experience where you are dealing with the real economy with actual trades.”
These quickly translate into real-world transactions, making it an opportunity-rich environment with many opportunities to engage with a dynamic global market and cultivate lasting relationships.
Quehenberger added, “A lot of the topics and economic developments that you see in the news, be it energy transition or high energy prices, will immediately land on your desk in the form of transactions.”
In this sense, the sector’s niche nature offers a unique perspective on global economic trends, presenting a dynamic and rewarding avenue for those who appreciate tangible impacts, meaningful relationships and the ability to navigate complex, real-world challenges.
As the trade finance market continues to evolve, insurance stands as a linchpin, bolstering stability and confidence in an interconnected world, serving as that safety-net-providing critical cornerstone of the economy.