TFG heard the latest updates in trade credit insurance and political risk appetite from the Berne Union. The Berne Union represents the export credit (ECA) and investment insurance industry. Vinco David, Secretary General spoke to TFG’s Deepesh Patel at ExCred Commodities London.
Featuring: Vinco David, Secretary General, Berne Union
Host: Deepesh Patel, Editor, Trade Finance Global
Export Credit and Investment Insurance, Today and Tomorrow
DP: How has credit and political risk appetite changed in 2019?
VD: Well when it comes to appetite, we have seen a gradual growth over the last few years. It’s not a massive growth, but it matches the growth in world trade. So, credit insurers and members of the Berne Union insure export credit and trade finance – that is, anything that crosses the border. And there has been a sound growth from our current members of the Union, insuring annually an amount of $2.5 trillion USD per year in new business and that represents about 13% of all world trade.
DP: What is the impact of the current geopolitical events on insurance?
Well, there are a few developments in the world that credit insurers really look at – one is the increased tension between some trading partners, trade conflicts impacting trade. What we see is that global supply chains are moving, moving away from China, for instance, to avoid tariffs in the US. Another development in the UK is Brexit, and we’ve already seen a slow down in investment in the UK, and an increase in claims; whether there is a direct link with the prospect of Brexit is not sure, but we’ve seen that the economic growth in the UK has slowed.
Other developments that credit insurers look at closely are the developments in the Gulf countries and the impact that this may have on the supply of oil and gas.
Northern Africa is still relatively unstable, and other parts of Africa too, which may have an impact on claims. But when you look at appetite, there is still an abundance of liquidity amongst credit insurers, the only question is whether there is sufficient liquidity for a particular type of business that wants to be insured.
DP: What is the current capacity versus demand in the market?
When we talk capacity, we can distinguish between private insurers and Export Credit Agencies (ECAs). Looking at the private market, there is abundant capacity, caused in part by low-interest rates but also due to institutional investors looking for alternative investments with higher margins than state bonds. One of these areas is within insurance, including credit insurance, which still offers quite nice margins. If you look at the loss ratios in the industry among private insurers, they are between 20 – 35%, which is quite benign given the current economic times. The combination of good margins in the credit insurance industry and interest rates causes abundance capacity, there are now about 60 private market players in the industry.
When you look at ECAs, they usually have a lot of market capacity because its in their mandate to support national industry exports. Banks may like SME exports because the margins are higher, but these small transactions require quite a bit of overhead, particularly when it comes to KYC, KYCC etc.
Export Credit Agencies and SME Finance
So that type of business may not always be profitable for either banks or private insurers and what you see now is that ECAs have stepped in to do more for SMEs today.
DP: Have they?
Yes, they have really. Some ECAs have in fact developed some new financing products for SMEs; previously ECAs were only insuring risks. So, there has certainly been some more attention by ECAs to serve the SMEs.
The biggest problem is not the willingness of ECAs to serve SMEs but SMEs do not always know where to find insurance or finance for their exports, so it is potentially a market development issue as well.
This podcast was in partnership with the Excred Commodity conference series.