Trade Credit Products Robert Nijhout

1 About ICISA

● Founded in 1928 (as ICIA)  first credit insurance association ● Registered under Swiss Civil Code ● Name changed in 2001 ● Secretariat based in Amsterdam ● Activities:  Networking: Meetings, Conferences, Workshops  Advocacy & Media Relations  Marketing  Market Research – data collection  Education & Training (STECIS Training Academy)

2 ICISA Members – 48 Members

Afianzadora Latinoamericana SE HCC International Askrindo ICIC Aspen Re Lombard Insurance Company Atradius Caución y Crédito AXA Assurcredit Mitsui Sumitomo AXA Winterthur AXIS Re Nationale Borg Catlin Re Novae CESCE PartnerRe China National Investment & Guaranty PICC Property and Casualty Company CLAL Credit Insurance PRISMA Coface R+V COSEC QBE Credit Guarantee SACE BT Ducroire | Delcredere SCOR Global P&C SE ECICS Seoul Guarantee Insurance Company SID-First Credit Fianzas Atlas Sompo Japan Fianzas Monterrey Garant Tokio Marine & Nichido Fire Insurance The Guarantee Company of Tryg Garanti Groupama Assurance-Crédit Zurich

3 Organisation

Accounting & Regulatory Committee

Committee of Underwriters

Committee on Management Credit Insurance Committee Issues

Secretariat President Asia Sub-Committee Vice-President Management Committee Single Risk Committee Executive Director

Communications Contact Solvency II Expert Group Surety Committee Network

Crisis Team

4 Meetings

• Annual General Meeting (AGM) (June) • Spring Meetings (March) • Autumn Meetings (September) (technical committee meetings) • Project Meetings • Ad Hoc Meetings

5 ICISA Membership Structure Membership  Credit Insurance Companies (= >95% of private c.i. market)  Surety Companies  Companies

 32 Credit Insurance  34 Surety  14 Reinsurance

Credit Surety Reins.

6 ICISA Members Geographical Spread

7 Association Networking

● AMAN UNION 2 shared members ● ALASECE 4 shared members ● 7 shared members ● PASA 22 shared members ● SFAA 6 shared members

8 Advocacy Partners

• European Union: • European Commission • EIOPA • ECB • Insurers of • IASB • ICC • OECD • World Bank • UNCITRAL • Media

9 Types of Cover

10 Types of Cover

• “Domestic” is just another country

• Commercial vs. Political Risk

• Whole Turnover vs. Single Risk Cover vs. XoL

• Credit Risk vs. Pre-Credit Risk

• Short-Term vs. Medium Term

11 Whole Turnover vs. Selected Cover vs. XoL

• Whole turnover policy  Covers seller’s total credit sales  Cover usually for 80-90%

• Single Risk Cover (single buyer cover)  Cover for all sales to one debtor or  Cover for a single contract with one debtor

• Excess of Loss (XoL)  Cover in excess of amount of first loss borne by the insured  First loss / threshold

12 Additional Services

• Prospecting

• Negotiation about payment condition

• Risk assessment of buyer

• Monitoring of buyer

• Debt collection on buyer

• Loss minimising

13 Trade Credit Insurance vs. Financial Guarantee

14 Official ICISA Definition - Financial Guarantee

A Financial Guarantee is understood as comprising any bond, guarantee, indemnity or insurance, covering financial obligations in respect of any type of loan, personal loan and leasing facility, granted by a bank/ credit institution, financial institution or financier or issued or executed in favour of any person or legal entity in respect of the payment or repayment of borrowed money or any contract transaction or arrangement – the primary purpose of which is to raise finance or secure sums due in respect of borrowed money.

By way of explanation, the purpose of this definition is the avoidance of insurance cover for any financial obligation which does not arise from or relates to a trade transaction defined as the supply of goods and/or rendering of services.

15 Trade Credit Insurance vs. Financial Guarantee (I)

Trade Credit insurance Financial guarantee Nature of the customer Protects the seller of goods against the Arranged at the request of the party default of his client Holder = beneficiary ≠ whose obligation is being guaranteed debtor Holder = debtor ≠ beneficiary

Covered Asset Coverage of the overall turnover 1°) Coverage of a specified Client (debtor) Future turnover not known at inception => for a specified amount and a specified premium not known 2°) Short term (90 lengh of time days) revolving receivables => identity and exposures not known

Pricing at inception Based on the historical rate of default of Credit risk analysis of the specified the prospect + on the historical rate of client (same as a loan) default of the trade sector + on the contribution to the diversification of the portfolio + anticipation of the state of the economy

16 Trade Credit Insurance vs. Financial Guarantee (II)

Trade Credit insurance Financial guarantee

Subsequent measurement Estimate of future cash flows of the Line by line solvency assessment portfolio Credit event Outside the control of the insured Arbitrage possible for the holder against other debt instrument (depending on negotiated interest rate at inception of the financial guarantee and the interest of his rating in the market at the date of the arbitrage)

Settlement Indemnity settled to the insured with Loan to the holder with additional subrogation on the receivable. No interest revenue additional revenue

17 ICISA Trade Credit Insurance Members Results 2011

• Premium: € 5.961 million

• Claims: € 2.615 million

• Claims Ratio: 43.9%

• Insured Exposure: € 1.658 billion

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Trade credit insurance premium, claims & claims ratio ICISA Members* (excl reinsurance members) Amount in EURO Claims Ratio in % 7,000 100%

90%

Millions 6,000 80%

5,000 70%

60% 4,000 Premiums 50% 3,000 Claims 40%

Claims Ratio in % 2,000 30% 20% 1,000 10%

0 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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Trade credit insurance Insured Exposure ICISA Members* (excl reinsurance members)

2,000

1,800 Billions 1,600

1,400

1,200 Insured Exposure 1,000 Trade Credit Insurance 800

600

400

200

0 2005 2006 2007 2008 2009 2010 2011

20 Market Penetration development

Source: Swiss Re

0.07%

0.06%

0.05%

0.04%

0.03%

0.02% Premium Volume in % % in GDP of Volume Premium 0.01%

0.00%

2006 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 2008 2009 USA Canada United Kingdom Germany France Italy Switzerland Spain Austria

21 Development of average premium rates

Index 100 = 2003 Source: Swiss Re

22 Lessons learned from the crisis

● Trade credit insurance is cyclical, driven by the economic environment ● Mitigate negative impact when cycle turns - policy terms/conditions and active monitoring ● Diversified portfolios are less vulnerable ● Identify a potential down-turn timely and take appropriate measures both on the risk and policy side ● For 2013, measures should have been taken in 2012 ● Premium rates need to be risk adjusted to be able to absorb higher loss in bad years ● Alignment of interest between policy holder and underwriter; retentions (>15%), aggregate limits and deductibles ● Make the cake bigger, through e.g. product innovation ● Transparency ● Consultancy role – “much more than insurance”

23 Single Risk Cover and the crisis

• The market fared well during the 2008-2009 global slump: . passed the stress test despite higher claims severity . one player withdrew . PRI market uptrend resilient showing rapid premium growth . ample capacity available two years later

• The last crisis recognized as largest loss occurrence met by the private market since its development

• “Pure” Political Risk coverage hardly affected • Single Risk Debtor coverage remains bulk of major claims.

• Unclear overall picture total claims during the period: • est. between 1.5 and 3 billion USD.

24 Lessons learned from claims

Recovery potential is at the heart of the PRI private market

• One of the most important aspect of PRI underwriting is about determining if there is a basis for securities and potential recovery.

• Claims related to Single Risk private Debtor raised several issues after crisis: . conflicts of local jurisdictions, notably with the emerging countries; . hard time for the Insurers in being entitled to exercise their rights belonging to the Insured in foreign jurisdictions; . narrow border between Sovereign Buyer / Private Buyer; . convergence of interests between private operators and ECAs in claim management still existing but limited common approach.

25 Bite the bullet

In the wake of the crisis, there is momentum forward-thinking on our business practices and reviewing the concrete and legal issues that we have to deal with:

• Refocus on definition and scope of PRI products. What about emerging non-trade related issue?

• Pursue innovation in products to meet new clients’ expectations as banks growing needs.

• Improve policy wordings with regard to law and jurisprudence evolution and market practices.

• Enforce recovery process (subrogation clause).

• Principle of a separate treatment of commercial debt and financial debt towards multilaterals?

26 The ICISA initiative

To better assess the efficiency of our industry, we should improve our market standards and practices, enhance data transparency and better structure the market to address the major challenges the PRI has to deal with.

• In June 2009, ICISA sets up a new committee for “non-traditional credit insurance business” launched under the influence of single risk insurance providers, members of ICISA.

• The ICISA Single Risk Committee organizes an annual meeting with Lloyds’s, ECAs and market political risk insurers that are not members of ICISA. Broadest representation of the Single Risk Market.

• The SRC has launched a number of important initiatives such as a market survey, a classification on product types as well as the terminology catalogue.

• Current concern: the principle of separate treatment of commercial debt vs. financial debt with the view that UNCTAD, the UN and the ICC acknowledge this principle in their standards in conformity with current practices.

27 The Current Market

Where are we now?  Hardening market  Ample reinsurance capacity  Premium income rising  Insolvencies increasing  Claims increasing: frequency – average claims size  Current crisis political (EU/USA)  Sovereign risk – ability to support  Trade Finance: lack of trust + Basle II & III  Growth in Asia & L America  Clients’ expectations

28 The Current Market

What are the consequences?

 Mismatch between risk and premium

 Reliability

 Transparency

29 The Current Market

What is the role of a private trade credit insurer?

 Support the economy?

 Support its clients?

 Protect its shareholders?

 Job security?

 All of the above?

30 The future of Trade Credit Insurance

● Internal:  Entry-level for new players is high  Differing risk perception: low rates vs. high risks  Shareholders changing demands

● External:  Effects of the crisis (euro? inflation? recovery?)  Solvency II favours diversified insurers  Ample reinsurance capacity

31 New Products

● Do we need new products?

● Excess of loss ● Cancellable/non-cancellable limits

● Benchmark:  Risk syndication  New risks – identify market concerns: . Environment . Sovereign/Political

32 New Players, New Challenges ● New underwriters – New reinsurers - Driver:  Ability  Capacity  Opportunity ● Negative economic outlook  Country risk concerns  Crunch in trade finance  Increasing claims - soft market ● New territories:  BRICs  Eastern Europe  Asia

33 Current Issues and Concerns

● Advocacy  Solvency II / CAT Risk  Accounting Standards (IFRS4)  Marketable Risks in the E.U.  Shadow Banking in the E.U.  Lack of financial information - E.U. and China  India: restrictions on underwriting trade credit

● Media & Communication:  Communication Contacts Network  Crisis Team  Asia Team

34 ICISA Media & Communication

 Press . Press conference calls . Press releases . Press meetings/ Press tour  Publications . Newsletter . Yearbook . Catalogue of Terms . Positioning papers . Book on trade credit insurance  Social Media . LinkedIn  Communication Contacts Network . Crisis Team . Asia Team . One Pagers

35 Education and Training

Training Seminars: – Two-Day Seminars: Basic + Advanced – Open Standard Seminars – In-House customised Seminars – One-Day Fly-In-Fly-Out

[email protected]

ICISA / JAN 2012 / General 36 Training Seminars 2013

20 – 22 March 2013 • Credit Insurance – Basic • Surety – Basic

12 – 14 June 2013: • Credit Insurance – Advanced • Surety - Advanced

[email protected]

ICISA / JAN 2012 / General 37

MERCI THANK YOU شكرا جزيال

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