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Trade Credit Insurance

Trade Credit Insurance Bolsters Supply Chains

Key drivers are increased retail distress, but also bank eagerness to monetize.
By: | September 12, 2017 • 5 min read

After languishing for decades as a small fraction of the trade credit insurance (TCI) market in Europe, the U.S. business has started to blossom. There are several main drivers, according to underwriters and brokers, notably the increased involvement by banks in monetizing sales receivables, the first signs of tightening credit since the great recession, and increasing retail distress and bankruptcies.

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According to James Daly, president and chief executive officer of Euler Hermes in the Americas, the premium value for TCI in the U.S. in 2016 was $717 million, an increase of 3 percent over the previous year. EH is one of the ‘Big Three’ global underwriters and the largest carrier in the sector in the U.S.

Marsh estimates premium totals in round numbers of about $1 billion in the U.S., $2 billion in Asia-Pacific, $4 billion in Europe, and $1 billion in the rest of the world for a grand total of $8 billion worldwide.

Daly detailed that his firm assesses the TCI penetration in a region by number of possible client firms.

“Our view is that dollar value is distorted. We could write one huge corporation and that would skew the numbers. Based on the insurable universe we see penetration in the U.S. at 3 percent of companies, as compared to 10-15 percent of possible companies in Europe.”

In roughly similar numbers, underwriter XL Catlin estimates that something between 4-7 percent of receivables are covered in the U.S., as compared to 15-20 percent in Europe.

“Supply-chain financing is a big application for TCI,” — Stephen Atallah, senior executive vice president for commercial and risk underwriting, Coface

According to estimates aggregated by brokerage Arthur. J. Gallagher from data provided by insureds, the volume of insured transactions written out of the U.S. grew from $48 billion in 1992 to $450 billion in 2012, adjusted for inflation. That includes domestic transactions as well as international transactions by entities operating and insured out of the U.S.

While that growth is impressive in absolute terms, it represents a large increase from a small base. Citing historical figures, Marc Wagman, managing director of Gallagher’s U.S. trade credit and political risk practice group detailed that the U.S. volume of insured transactions grew during those 20 years from well under one half of one percent of gross domestic product to more than 3 percent of GDP. In contrast, the portion of insured transactions in other OECD countries ranges from 5 percent to 8 percent of GDP.

“It is true that the percentage of participation is higher in Europe than in the U.S. but that gap has narrowed,” said Wagman.

“Demand in this country has been quite robust, and as a result more underwriters are coming in.”

While still a fraction of the market size in Europe and Asia, TCI has grown robustly in the U.S.

“When I started in this business in 1996 there were maybe half a dozen underwriters writing short-term, multi-buyer coverage,” Wagman added.

“Now we work with at least 15 carriers, and there are dozens of Lloyd’s markets.”

Marc Wagman, managing director of Gallagher’s U.S. trade credit and political risk practice group

Within any country or region, premiums vary according to the size of the insureds and their business models.

“The average premium in the U.S. is about $40,000 a year,” said Daly at EH. “In the U.K. that would be similar. But in a country like Poland the average premium drops to about 10,000 euros because the companies there are smaller and there are more start ups.”

Which is not to say that small firms are lesser clients. Quite to the contrary.

“We become part of the client’s risk and credit management,” said Daly.

“This is how they expand safely and it is the real growth driver. Say there is a small manufacturer in the U.S. that has grown well domestically, and suddenly gets an order for 10,000 widgets from Chile, on 30-days’ terms. We can tell that manufacturer, ‘go ahead, trade, we know that buyer, we will underwrite the risk.’ The insurance part is only the last piece. The information comes first.”

As the U.S. market grows, adding underwriters and capacity, innovation follows. “There is a willingness to write larger single-buyer limits on sub-investment grade names as well as more ‘non-trade’ type of business,” said Wagman at Gallagher.

“And there are more carriers willing to write non-cancellable coverage or hybrid programs that have both non-cancellable and cancellable components.”

He stressed that the underwriting approach taken — cancellable versus non-cancellable — depends upon the client’s needs. In a non-cancellable policy, the underwriter commits to insure counter-party risk for the insured up to a limit, and that limit is good for the policy year, even if there is deterioration of the insured’s credit risk.

In a cancellable policy, if there is a deterioration of the client’s credit risk, the carrier can give a month or two of notice and cancel the limit for future shipments. The underwriter is still responsible for coverage of existing receivables up to that point.

Wagman observed that cancellable coverage is often misunderstood.

“This is not the insurer telling the client with whom to do business. For the most part, cancellable coverage is for smaller businesses that don’t have their own credit departments and rely upon the underwriter for that credit limit decision-making support.”

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The growing element in TCI is lending and capitalization, said Stephen Atallah, senior executive vice president for commercial and risk underwriting at Coface, another of the Big Three global underwriters. The third is Atradius.

“Supply-chain financing is a big application for TCI,” Atallah said.

“The banks have discovered this, and are gulping up capacity,” he said. That’s led to more product innovation, he added.

Banks that acquire receivables may be the insureds themselves, or they may be the loss payee on receivables pledged as collateral. Sometimes banks require TCI before they will lend against receivables, other times they merely make it known that insured business gets an advantage on rates and terms.

Atallah noted that hybrid contracts, with a non-cancellable top tier and cancellable coverage for the bulk of an insured’s sales, has been around for a long time.

“Those are a way to address the common mismatch between what the client wants and what the carriers can underwrite. Clients often want non-cancellable coverage for riskier customers. The innovation is delayed cancellation. No one wants to wake up to find they don’t have coverage. Pulling a line should not throw a business into turmoil. So now there is 30-, 60-, and 90-day notice.”

While carriers might bemoan soft rates in a competitive market, Clay Sasse, managing director and U.S. practice leader for trade credit at Aon suggested that new entrants are spurring penetration.

“Once the recession was over, everyone was still spooked,” he recalled. But since then the participants have increased greatly. &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.