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 [email protected]

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]