With Trade Wars on the Horizon, You Should Be Using This Type of Insurance

As global trade tensions rise, companies are increasingly looking at a type of insurance coverage that remains little used in the United States but provides a tool to deal with the risks linked to trade wars.
By: | October 24, 2018 • 7 min read

As global trade tensions rise, companies are increasingly looking at a type of insurance coverage that remains little used in the United States but provides a tool to deal with the risks linked to trade wars.

Brokers and carriers say that a growing number of clients are showing interest in the purchase of trade credit insurance, a product that is widely used by European companies but has traditionally played a limited role in risk management strategies deployed by U.S. groups.

But the situation is gradually changing, and North America is now, along with Asia, the main source of premium growth for the segment in the whole world. Euler Hermes, one of the main players in the segment, estimates that premiums are growing by 10 percent on an annual basis in the U.S.

Global Tension Leads to More Tariffs

The coverage enables companies to mitigate the impact of supply chain disruptions and the risk of not getting paid by clients when trade conditions deteriorate. It is the kind of business environment that could become the norm as protectionism makes strides in several countries, including the U.S. and China, the world’s largest economies.

Earlier this year, President Donald Trump imposed higher tariffs on imports of steel and aluminum from several foreign markets in a move that many observers interpreted as mostly aimed at China. The Chinese government, as well as other countries, reacted with its own set of tariffs on certain American products, meaning that $50 billion worth of products traded between the U.S. and China are now subject to higher levies. China’s response led the U.S. government, in September, to impose further 10 to 25 percent tariffs on other imports from the Middle Kingdom, including chemicals and plastic.

And More Tariffs Lead to Increased Credit Risk

As the conflict escalates, companies in different business sectors have started to bear the brunt in the shape of extra costs across their supply chains, drops of sales and lower margins. Goldman Sachs, an investment bank, has estimated that, if a 25 percent tariff is imposed on all Chinese exports to the U.S., earnings per share at companies included in the S&P index should fall by 7 percent. Alvarez & Marsal, a consultancy, has calculated that America’s beverage industry will lose about $350 million with the tariffs imposed on steel and aluminum alone.

Sectors of the economy that rely heavily on imports from China are particularly exposed to the risk. A survey with 430 companies by a couple of American Chambers in China estimated that half of them expect lower profits because of the new tariffs. American-based groups like Steelcase and Hormel Foods have already reported that results are likely to suffer. It all has fueled the perception in the market that credit risk is on the rise.

“Most of the effects of tariffs are still to be felt, but, in certain industries such as metals, there has already been a material impact in terms of impacts on coverage for trade credit risk,” said Marc Wagman, the managing director of the U.S. Trade Credit practice at Gallagher. “Companies that rely on ferrous and non-ferrous metal imports from China have requested higher limits, because costs have increased by 25 percent across the board.”

“Companies that rely on Chinese imports are probably the most material example of trade credit risk nowadays,” added Jeff Abramson, a senior vice-president at AXA XL in the U.S.

Coming Up With Risk Solutions

To mitigate the risk, companies are adopting different kinds of strategies. Some, for instance, are trying to convince their suppliers located in China and other markets to absorb the costs added to the import of products such as electronic components.

“When the good supplied is in high demand in the U.S., as it is the case with some high-tech products, or has strong IP, suppliers may eat the tariff before the customer takes receipt,” said James Daly, CEO of Euler Hermes North America. “That is still rare, but we are seeing some cases like that.”

Others are striving to diversify their portfolio of suppliers away from China in order to reduce the risk of disruption to their supply chains. “Clients that are heavily reliant on Chinese ferrous and non-ferrous steel are now looking at suppliers in other markets such as Turkey, Thailand and India, and some of them have been really successful at it,” Wagman said.

“Many companies have not found yet alternative supply chain partners they can work with. They cannot stop receiving goods from China.” — James Daly, CEO of Euler Hermes North America

But switching business partners is a tricky proposition as companies must trade with new suppliers about which they often have little information. Several practical issues like new freighting and receiving arrangements, warehousing and distribution also have to be sorted out, requiring significant investments in time and money.

“Many companies have not found yet alternative supply chain partners they can work with. They cannot stop receiving goods from China,” Daly said. “It is very difficult, and it takes time, for companies to find new suppliers in countries that have not been hit by higher tariffs.”

The third option is to simply pass the extra costs on to the final consumer, which is a daunting task in industries where competition is tough, such as retail and car making. Therefore, treasury departments have been forced to find ways to mitigate the risk in a process that appears to be benefiting trade credit insurers.

Trade Credit Insurance and the U.S.

“More companies are looking at trade credit insurance nowadays,” said Michael Kornblau, the U.S. Trade Credit Practice Leader at Marsh. “Although it is not possible to say that higher demand is completely related to higher trade tensions, it is certainly a factor weighing on their decisions.”

Trade credit insurance can help companies by providing an extra certainty that their invoices will be paid, even though their clients struggle to make ends meet. It can strengthen confidence on the robustness of supply chains if a company knows that suppliers are also protected from eventual non-payments by their own clients.

Two main kinds of coverage are offered in the market presently.

The most traditional one, offered mostly by Euler Hermes, Coface and Atradius, the monoline insurers that dominate the segment in Europe, are ground-up whole turnover coverages that fully guarantee payments that policyholders expect from their clients. To a certain extent, it is tantamount to delegating trade credit management to the underwriter, as it will execute full financial analyses of potential clients, determining whether it is a good idea to sell them on credit. Additional services include analyses of political and sector risks and the checking of providers’ financial situation.

“We are helping our clients to identify where their supply chain relationships may be under threat,” Daly said.

“We grant larger authority to insureds to make their own credit decisions, they take larger deductibles and we underwrite a share of their key counter-party risks. We believe this is an approach that is better suited to middle-market and larger U.S. companies that have invested in their own credit management functions.” — Jeff Abramson, senior vice-president, AXA XL

But the market has realized that American companies have historically preferred to manage their trade credit risk by themselves, setting up their own teams to investigate the credit worthiness of potential clients and raising banking facilities to reduce the risk. For these kinds of companies, an excess of loss coverage, often with a catastrophe component, can look like a better option.

“We write trade credit insurance on an excess of loss basis,” Abramson said. “We grant larger authority to insureds to make their own credit decisions, they take larger deductibles and we underwrite a share of their key counter-party risks. We believe this is an approach that is better suited to middle-market and larger U.S. companies that have invested in their own credit management functions.”

In that case, trade credit insurance provides not only an extra layer of certainty regarding the payment of invoices, but also an argument to request banks to provide trade credit facilities at lower rates, noted Doug Collins, an executive VP and head of trade credit at Ascot Underwriting, a London-based carrier planning a launch of a trade credit insurance operation in the U.S. during the first quarter of 2019.

The looming entry of Ascot and another player, The Hartford, illustrate the expansion of both demand and capacity of trade credit insurance in the U.S. Brokers say that if 20 years ago there were half a dozen insurers writing the coverage in the U.S., now the number hovers around 20.

“Capacity has increased after the latest crisis, and more is coming into the market,” Kornblau said. As a result, even though credit risk levels are rising with the current trade conflicts, market players do not expect rates to go up in a segment where the long soft market has made its imprint. Brokers say, however, insurers are beginning to take more questions to their clients before they sell them a policy.

They are also keeping an eye on the risk that companies suffer with non-tariff shrapnel from ever nastier trade battles.

“Especially for privately-held buyers in commodity-oriented industries, the regularity of financial disclosures has become more important than ever,” Wagman said.

“And with regards to those clients that have a real export focus, they have to make sure that they stay ahead of changes in regulation in markets like China, where the relationship with the U.S. is turning ever tenser. American companies in China will be increasingly scrutinized regarding compliance to every conceivable measure, and compliance costs will be higher as a result.” &

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at riskletters@lrp.com.

In the Fast-Paced World of Retail, This Risk Manager Strives to Mitigate Risks Proactively and Keep Senior Leaders Informed

Janine Kral works to identify and mitigate risks, building strong partnerships with leaders and ensuring they see her as support rather than a blocker. 
By: | October 29, 2018 • 4 min read

R&I: What was your first job?

My very first paid job was working on my uncle’s ranch in British Columbia in the summers. He had cattle, horses and grapes — an unusual combo. But my first real job out of college was as a multi-line claims adjuster at Liberty Mutual.

R&I: How did you come to work in risk management?

Right out of college I applied for a job that turned out to be a claims adjuster at Liberty Mutual. I accepted because they were offering six weeks of training in Southern California, and at the time that sounded really fun. I spent about three years at Liberty Mutual and then I spent a short period of time at a smaller regional insurance company that hired me to start a workers’ compensation claims administration program.

I was hired at Nordstrom as the Washington Region Risk Manager, which was my first job in risk management. When I started at Nordstrom, the risk management department had about five people, and over the years it has grown to about 75. I’ve been vice president for 11 years.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

I would say that technology has probably been the biggest change. When I started many years ago, it was all paper and no RMIS.

Advertisement




R&I: What risks does the retail industry face that are unique?

We deal with a lot of people — employees and customers. With physical brick and mortar settings, there are the unique exposures with people moving in and out in a public environment. And of course, with ecommerce, we have a lot of customer and employee data, which creates cyber risk — which is not necessarily a unique risk in today’s environment.

R&I: Can you describe your approach to working with senior leaders and front-line staff alike to further risk management initiatives?

It starts with keeping the pulse of what’s happening with the business. Retail moves really fast. In order to identify and mitigate risks proactively, we identify top risk areas and topics, and then we ensure that we have strong partnerships with the leaders responsible for those areas. Trust is critical, ensuring that leaders see us as a support rather than a blocker.

R&I: What role does technology play in your company’s approach to risk management?

Janine Kral, claims adjuster, Nordstrom

We have an internal risk management information system that all of our locations report events into — every type of incident is reported, whether insured or uninsured. Most of these events are managed internally by risk management, and our guidelines require that prevention be analyzed on each one. Having all event data in one system allows us to use the data for trending and also helps us better predict what may happen in the future, and who we need to work with to mitigate risks.

R&I: What advice might you give to students or other aspiring risk managers?

My son is a sophomore in college, and I tell him and his friends all the time not to rule out insurance as a career opportunity. My advice is to cast a wide net and do your homework. Research all the different types of opportunities. Read a lot — articles, industry magazines, LinkedIn. Be proactive and reach out to people you find interesting and ask them about their careers. Don’t be shy and wait for people and opportunities to come to you. Ask questions. Build networks. Be curious and keep an open mind.

R&I: What are your goals for the next five to 10 years of your career?

I have always been passionate about continuous improvement. I want to continue to find ways to add value to my company and to this industry.

R&I: What is your favorite book or movie?

My favorite book is Shantaram by Gregory David Roberts. It’s a true story about a man who was in prison in Australia after being convicted of armed robbery, and he escaped to India. While in India, he passed himself off as a doctor in a slum. It’s a really interesting story, because this is a convicted criminal who ends up helping others. I am not always successful in getting others to read the book because it’s 1,000 pages and definitely a commitment.

R&I: What’s the best restaurant you’ve ever eaten at?

Fiorella’s in Newton, Massachusetts. Great Italian food and a great overall experience.

Advertisement




R&I: What is your favorite drink?

“Sister Carol.” I have no idea what is in it, and I can only get it at a local bar in Seattle. It’s green but it’s delicious.

R&I: What is the riskiest activity you ever engaged in?

Skydiving. Not tandem and without any sort of communication from the ground. Scary standing on a wing of a plane, but very peaceful once the chute opened, slowly floating down by myself.

R&I: If the world has a modern hero, who is it and why?

I can’t think of one individual person. For me, the real heroes are people who have a positive attitude in the face of adversity. People who are resilient no matter what life brings them.

R&I: What about this work do you find the most fulfilling or rewarding?

It’s rewarding to help solve problems and help people. I am proud of the support that my team provides others. &




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at kdwyer@lrp.com.