Trade Credit Insurance Blossoms at Last in the U.S.
After languishing for decades as a small fraction of the trade credit insurance (TCI) market in Europe, the U.S. business is blossoming. 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.
According to James Daly, president and chief executive officer of Euler Hermes in the Americas, the U.S., 2016 premium value for TCI in the U.S. was $717 million, an increase of 3 percent over the previous year. EH is one of the ‘Big Three’ global trade credit 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 elsewhere for a global total of $8 billion.
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 the Europe.
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.”
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 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 has grown, adding underwriters and capacity, there has been innovation.
“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.
“The banks have discovered this, and are gulping up capacity. That is driving innovation in the coverage.”– Stephen Atallah, senior executive vice president for commercial and risk underwriting, Coface
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. Non-cancellable is primarily for larger operations that do most, if not all, of their own credit analysis. In non-can, the carrier is effectively underwriting the client’s credit management.”
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.
“The banks have discovered this, and are gulping up capacity. That is driving innovation in the coverage.”
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 in 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 a lot of new carriers with a lot of capacity came in. They were betting that there would not be any huge knock-out bankruptcies, and they were correct. That over capacity overcame the damage that had been done during the recession.”
Scott Ettien, trade credit practice leader at Willis Towers Watson, observed that the credit environment since the great recession has been fairly benign. But recent structural changes in retail, such the boom in on-line sales, are forcing retailers to change the way they do business.
“If they don’t keep up, they fail. The payment for a claim is important, sure, but avoiding the loss is more important in the first place.”
Another widely noted factor in different rates of penetration in the U.S. and Europe is simply cultural. This is anecdotal, but something most sources mentioned.
“The business culture in the U.S. is generally more risk tolerant,” noted Jeffrey Abramson, head of the trade receivables practice at underwriter XL Catlin.
“Companies can protect their receivables in lots of different ways, including choosing not to. Which is self insuring. It seems that we have been talking about increasing penetration rates in the U.S. for 15 years. At last it feels like progress.”
Michael Kornblau, U.S. trade credit practice leader at Marsh, said that the uptick in bankruptcies is increasing awareness for TCI.
“Interestingly, bankruptcies are increasing, but premiums are not increasing because capacity is increasing.” He also notes growth in Europe.
“The European banks are using TCI for capital relief under the Basel III Accords.”