denotes premium content | Sep 3 2010 
Regular
posted 26 Jun 2009 in Volume 12 Issue 8
60-second interview
Kimberly Wiehl discusses the responses of Berne Union members to the credit crunch and recession.
Q1 – How have the credit and investment insurers responded to the financial crisis?
Berne Union members have been regularly discussing the impact for more than 18 months, with the most intense scrutiny at our recent meeting in early May. The message we came away with is that with careful assessment and monitoring of the risks in the deteriorating economic environment, the insurers are weathering the crisis – at least so far.
According to our latest survey, in general, the industry has reacted swiftly and proactively, while upholding the high underwriting standards required in these conditions. There is a great increase in demand for credit insurance from exporters and bankers, which is counter-balanced by the impact of a sharp decline in world trade and exports from key European and Asian economies. Some insurers have taken a more restrictive approach to new business, while others have been able to offer greater flexibility to meet the needs of banks and exporters.
We are finding that the most affected area in trade finance is the scarce availability of bank liquidity, whereas there is ample insurance capacity available for acceptable risks.
Q2 – What do you think have been the most effective responses by export credit agencies to support trade and trade finance?
The results from our comprehensive survey suggest that export credit agencies (ECAs) have been very well supported by their authorities. With this support, many ECAs have taken necessary action to step in where they see market gaps.
The most effective programmes are those where:
- The execution has been timely and efficient;
- The benefit is additional insurance capacity or access to funding; and,
- There is a clear plan for the exit once market conditions improve.
The main activities the ECAs have concentrated on are:
l Working to retain existing clients, while reviewing new business opportunities, particularly from clients that have not used credit insurance before;
l Increasing capacity, as well as the percentage of cover;
l More support for short-term trade credit from government insurers – both in terms of insurance and funding;
l New products or modifications to existing products, particularly to meet the need for working-capital guarantees and to cover letter of credit confirmations;
l Closer cooperation with authorities to modify programmes to better meet the needs of exporters and banks.
Q3 – Have the terms and conditions which have been temporarily relaxed by the EU and OECD had a positive impact?
The European Union (EU) has allowed for a temporary relaxation in the ability of ECAs to cover marketable risks. To date, Luxembourg and Denmark have had their schemes approved, with a number of other EU ECAs waiting for their proposals to be approved. The fact that these schemes are being activated will help alleviate the gap in the current levels of cover available and, as these are temporary measures up to 2010, there should be a natural exit when market conditions improve.
While the main area affected by the crisis is in the short-term end of the business, the measures enacted by the Organisation for Economic Co-operation and Development (OECD) send a powerful signal that it is willing to be flexible, again on a temporary basis, to assist in improving cover availability for a number of the developing markets.
Q4 – What is the current trend in claims and what is the outlook ahead?
Current trends are quite distinct across the three main lines of business, as covered by Berne Union’s statistics.
For political risk insurers, there has been very little change in the outlook for future claims. The medium and long-term business has not yet recorded any increase in actual claims paid, but the insurers do report that there has been a noticeable increase in claims notifications – the warning signal for future claims.
As expected, the short-term business has seen the most significant rise in claims. Berne Union statistics reveal a significant increase in claims in the first quarter of 2009, up by 25% on the last quarter of 2008. Again, there is a substantial increase in claims notifications, but it is too early to predict whether these notifications will ultimately materialise into full claims.
Q5 – How would you characterise the main trends in the credit insurance industry today?
Most credit and investment insurers are experiencing a strong increase in demand. However, a few are actually experiencing a drop in applications for insurance cover following the sharp fall in exports and the postponement or cancellation of larger-scale projects.
Clearly, governments have been supportive of national ECAs, and the EU and OECD have been flexible, too. As a result, there is ample insurance capacity available for risks that are acceptable in today’s economic climate. While there are some signs of improvement, the overall level of bank liquidity remains scarce for trade transactions across all tenors.
This has led government insurers to introduce new or modified products to improve access to funding and, in some cases, to provide funding directly. We will be looking to see how the claims situation develops over the coming months.
So far, insurers are not experiencing an unanticipated amount of higher claims volume, but with notifications continuing to increase there may be more in store. Either way, this will be a continued area of focus for all Berne Union members while we work through the current unprecedented shift in the business cycle.
Kimberly Wiehl is the Secretary-General of Berne Union, the global trade body for export credit and investment insurers. She can be contacted by e-mailing bu-sec@berneunion.org.uk
