Trade Credit Insurance

Trade Credit Insurance Blossoms at Last

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

Risk Management

The Profession

This senior risk manager values his role in helping Varian Medical Systems support research and technologies in the fight against cancer.
By: | September 12, 2017 • 5 min read

R&I: What was your first job?

When I was 15 years old I had a summer job working for the city of Plentywood, mowing grass in the parks and ballfields, emptying garbage cans, hauling waste to the dump, painting crosswalk lines.  A great job for a teenager but I thought getting a college degree and working in an air-conditioned office would be a good plan long term.

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

I was enrolled in the University of Montana as a general business student, and I wanted to declare a more specialized major during my sophomore year. I was working for my dad at his insurance agency over the summer, and taking new agent training coursework on property/casualty risks in my spare time, so I had an appreciation for insurance. My dad suggested I research risk management for a career, and I transferred sight unseen to the University of Georgia to enroll in their risk management program. I did an internship as a senior with the risk management department at Sulzer Medica, and they offered me a full time job.

R&I: What could the risk management community be doing a better job of?

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We need to do a better job of saying yes. We tend to want to say no to many risks, but there are upside benefits to some risks. If we initiate a collaborative exercise with the risk owners — people who may have unique knowledge about that particular risk — and include a cross section of people from other corporate functions, you can do an effective job of taking the risk apart to analyze it, figure out a way to manage that exposure, and then reap the upside benefits while reducing the downside exposure. That can be done with new products and new service offerings, when there isn’t coverage available for a risk. It’s asking, is there anything we can do to reduce the risk without transferring it?

R&I: What emerging commercial risk most concerns you?

Cyber liability. There’s so much at stake and the bad guys are getting more resourceful every day. At Varian, our first approach is to try to make our systems and products more resilient, so we’re trying to direct resources to preventing it from happening in the first place. It’s a huge reputation risk if one of our products or systems were compromised, so we want to avoid that at all costs.

We need to do a better job of saying yes. We tend to want to say no to many risks, but there are upside benefits to some risks.

R&I: What insurance carrier do you have the highest opinion of?

I’ve worked with a number of great ones over the years. We’ve enjoyed a great property insurance relationship with Zurich. Their loss control services are very valuable to us. On the umbrella liability side, it’s been great partnering with companies like Swiss Re and Berkley Life Sciences because they’ve put in the time and effort to understand our unique risk exposures.

R&I: How much business do you do direct versus going through a broker?

One hundred percent through a broker. I view our broker as an extension of our risk management team. We benefit from each team member’s respective area of expertise and experience.

R&I: Is the contingent commission controversy overblown?

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I think so. The brokers were kind of villainized by Spitzer. I think it’s fair for brokers and insurers to make a reasonable profit, and if a portion of their profit came from contingent commissions, I’m fine with that. But I do appreciate the transparency and disclosure that came out as a result of the fiasco.

R&I: Are you optimistic about the US economy or pessimistic and why?

David Collins, Senior Manager, Risk Management, Varian Medical Systems Inc.

While we might be doing fine here in the U.S. from an economic perspective, the Middle East is a mess, and we’re living with nuclear threat from North Korea. But hope springs eternal, so I’m cautiously optimistic. I’m hoping saner minds prevail and our leaders throughout the world work together to make things better.

R&I: Who is your mentor and why?

My Dad got me started down the insurance and risk path. I’ve also been fortunate to work for or with a number of University of Georgia alumni who’ve been mentors for me. I’ve worked side by side with Karen Epermanis, Michael Rousseau, and Elisha Finney. And I’ve worked with Daniel Dean in his capacity as a broker.

R&I: What have you accomplished that you are proudest of?

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Raising my kids. I have a 15-year-old and 12-year-old, and they’re making mom and dad proud of the people they’re turning into.

On a professional level, a recent one would be the creation and implementation of our global travel risk program, which was a combined effort between security, travel and risk functions.

We have a huge team of service personnel around the world, traveling to customer sites to do maintenance and repair. We needed a way to track, monitor and communicate with them. We may need to make security arrangements or vet their lodging in some circumstances.

R&I: What do your friends and family think you do?

My 12-year-old son thought my job responsibilities could be summed up as a “professional worrier.” And that’s not too far off.

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

Varian’s mission is to focus energy on saving lives. Proper administration of the risk function puts the company in a better position to financially support research that improves products and capabilities, helps to educate health care providers and support cancer care in general. It means more lives saved from a terrible disease. I’m proud to contribute toward that.

When you meet someone whose cancer has been successfully treated with one of our products, it’s a powerful reward.




Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]