A world of opportunity

Although a stuttering global economy and strong pound seem like poor conditions for covering exports, trade credit insurers can still find opportunities - if they are brave enough to look. Rachel Gordon reports

Over the past few weeks, the global economy has looked increasingly shaky. A borrowing squeeze - the so-called credit crunch - is having an impact across the markets, threatening major businesses and consumers.

While the headlines are alarming, trade credit insurers continue to ply their trade. Employing teams of expert analysts, they are more aware than most of the true state of this supposed crisis. And while they will be scrutinising the most highly leveraged companies, it seems brokers will not find many markets closed for their exporting clients.

Credit insurers themselves are part of the UK's biggest single export - financial services. And, as such, they form a competitive sector that serves a huge range of businesses, both exporters and those in the domestic market, seeking protection against bad debts - whether non-payment or protracted default. Some have forged alliances with banks, others offer services such as factoring or debt collection services, but the UK's trade credit insurers all have one thing in common: they are hungry for business.

Most in the sector agree that moves by central banks to improve liquidity have averted any major economic disaster, although it is expected that reinsurers may seek to impose small increases next year. Bryan Gibbons, chief executive of Aon Trade Credit, says: "I don't think there will be a knee-jerk reaction to the credit crunch. Although reinsurers are looking for rate increases, there is currently too much competition for them to go through the roof. My view is that it makes sense for those clients looking to buy cover to purchase it now while conditions are benign."

Dennis Kennedy, chief export underwriter at Coface, comments: "In this market, you get very used to the cycle. We're in a soft market, but we're now seeing claims rise. It remains a competitive market and underwriters need to balance market conditions with this."

It is certainly not all doom and gloom. At the recent Coface Country Risk Conference, some 76% of respondents said they did not believe a global recession was on the way within the next 12 months. But they were less enthusiastic about UK exporters' prospects, saying the current strong pound was bad news for those looking to do business abroad; with rising interest rates further compounding the problem.

Traditionally, payment for manufactured goods formed the basis of trade credit insurance business. However, the most recent research by the British Chambers of Commerce revealed there have been nearly 8000 job losses across the UK manufacturing sector since the beginning of the year and, while the economy continues to grow as a whole, this sector is in decline. Indeed, Marsh's trade credit practice leader Tim Smith points out that the market has remained fairly static because the declining manufacturing sector and rising interest rates have reduced competitiveness.

Nonetheless, he says the trade credit market offers a quality service to its policyholders, providing top-flight intelligence and prompt claims payouts when required. "Underwriters are working hard to provide a good service and, where possible, make cover affordable through flexible payment terms. We are also seeing more agreements to insure single risks - although, typically, insurers prefer 'whole of turnover' business because it gives a spread of risk." And, as Mr Gibbons says: "There is more collaboration between insurers. They want the business so are more prepared to work together in the area of top-up cover where this is necessary."

Broker dominance

Trade credit insurance remains dominated by national brokers. Mr Smith argues that this is an advantage for exporting clients: "Because we have so many offices overseas, Marsh will have the local knowledge - for example, on payment issues - that we can pass on." While Mr Gibbons adds: "Particularly with a less experienced client, a broker should be able to provide a consultancy service, which could help the way they shape terms."

Looking at this market from a high-level industry perspective, Malcolm Tarling, spokesman for the Association of British Insurers, comments: "As an industry, the credit insurers do feel there is potential to grow and see the obvious route to this being intermediaries. We're also looking to promote awareness of the market."

According to the ABI, the domestic market for credit insurance is larger than that for export. In 2006, the overall market was worth £258m in premiums - comprising £116m for domestic cover and £88m for exports - while non-UK companies purchased £53m in insurance.

So, what is the principal destination for UK exports? And what can be expected over the year in economic terms that may shape its insurance risk profile? The majority of export business is within the Eurozone. According to economist Paul Smith, whose company NTC Economics works in conjunction with insurer Euler Hermes, the UK market remains in good shape. "As in recent months, our research shows there has been growth in UK export markets with our Euler Hermes index remaining comfortably above the crucial 50.0 no-change mark, which separates contraction from expansion, throughout 2007." He explains the region has benefited in particular from "a resurgent Germany and strong expansionary activity in its corporate sector".

However, Mr Smith does note that the Eurozone economy is likely to move down a gear in 2007/2008, but he expects conditions to remain favourable. "With low unemployment supporting domestic consumption and export trade remaining healthy - despite the strength of the euro - the region should still continue to expand at a reasonable clip."

There is little doubt that European Union member states are seen as a safer bet compared with many other higher risk countries, but that is not to say they are homogenous in their attitude to paying bills. In fact, there are vastly differing performances on this front and companies dealing with Italian firms, for example, could have a long wait on their hands before payment comes in (see box).

Lawyer Simon Jones, a partner with Clyde and Co, says: "People can be of the impression that if someone is importing to Europe there are not going to be a great deal of differences, but although there are insolvency laws there is variation." For example, he points out that Germany tends to take a far harder line on bad debts than the UK.

Mr Jones agrees there is growth potential in the trade credit market but says: "The credit insurance market is fairly stagnant. There is resistance from some companies who question why they should buy insurance if they know their buyers well. Instead, they may only feel the need for it if their bank insists on it."

Yet, if this is the case, it could be that the bank has some inside information about the potential buyer being in trouble. So although competition in the market has led to more insurers being willing to underwrite single risks, they want to avoid adverse selection. The Lloyd's market in particular may be willing to look at single risk cover, and it is certainly not necessarily bad business. A company could, for example, be a highly specialist manufacturer of scientific equipment and make only a few extremely high-value items. If these were only exported occasionally then whole of turnover cover might not be appropriate.

Mr Jones comments: "For brokers and clients, this is a good time to buy. Premiums have come down and insurers' policies - such as Atradius, which has produced a policy called Modular - can be increasingly tailored to their needs. In my experience, there is also a fair claims service; competition means insurers don't want to lose clients." He adds that there are plenty of traps for exporters without insurance to fall into, not least difficulties over retention of title issues. This is a clause written into a sales contract and means if the buyer becomes insolvent, retention of title provides the best security for goods and money owed. It may also mean that the seller can enter the buyer's premises and recover the goods.

"Some of these clauses have been around for 30 years and they need revising," says Mr Jones. "Another problem, for some exporters, is that it may not always be clear that they are actually dealing with a customer's agent, which again can cause delay or payment problems. I am aware of a case where the customer's agent was in Hong Kong, but the actual client was in China where different terms existed."

New kids on the block

One of the newest entrants to the market is QBE. Over the past couple of years, it has been quick to make a name for itself by racking up business in the credit insurance market with income growing from £1.5m to £30m. Portfolio manager for trade credit Jeremy Hughes joined from Amlin Credit and is now part of a growing team at QBE. Like the other main providers, one of its key aims has been online quote and financial information provision, with the past year seeing the launch of its CreditQube system. Mr Hughes says many export risks lie in Europe, but riskier countries can be covered through QBE's Lloyd's access.

He agrees that there could be premium rises in 2008, as a result of upcoming meetings with reinsurers. "We can expect underwriters to be more cautious, but there is no point in them going round in the dark. It will be about finding solutions for clients." He is positive about the longer-term market: "Despite interest rate rises, recent trade figures have been strong. We're also insuring many companies who are new to credit insurance."

Trade credit insurers are also keen to emphasise that they do not want to take a hard line approach on exporting to riskier countries, or towards those who are involved in less-stable sectors. Even in the UK, a number of well-known businesses have gone under ranging from Farepak Hampers, music chain Fopp and gift voucher company Choices. Underwriters say that the impact of online shopping and music downloads is putting pressure on some retailers, but claims can also arise out of the blue. The recent foot and mouth outbreak in Surrey, for example, has prompted claims. Mr Jones adds that sudden extreme weather can also give rise to claims. For example, if a Caribbean business was affected by a hurricane and unable to pay an exporter as a result.

Claims in these instances will often be covered under the political risk element of a credit policy, which will generally be purchased for exports to higher risk countries. Simon Groves, brand manager for Atradius, comments: "Claims are increasing and foot and mouth triggered a number of these. For example, one exporter of cattle feed was affected and, likewise, the floods caused problems in companies sending goods out of the country."

Getting territorial

Specialist insurers are also keen to demonstrate they can cover large territories. Atradius is now part of Spanish insurer Credito y Caucion and brokers say this means it can now cover Latin America - parts of which are high risk - far more easily. Atradius country manager Paul McLoughlin says cover can be offered for those exporting to many volatile countries, including those in Africa and the Middle East - even Iran and Iraq may still be considered on a case-by-case basis. "Situations in countries and with individual companies can change suddenly and we have teams investigating both companies' finances and the political risk situation," he explains. "Credit insurance goes way beyond just paying claims. The information that a potential problem exists can be more useful to a business and allow them to stop before having to make a claim."

In terms of risky countries, Hiscox offers cover that is often complementary to mainstream credit insurance. Head of political risk Andrew Underwood comments: "When it comes to no-go zones, Lloyd's has a tendency of covering most areas. We specialise in emerging markets, which the standard credit insurers may be less comfortable with or would offer more-restricted cover. But I would also remind clients that the UK government could also take action that could trigger a claim, such as introducing trading restrictions; foreign policy can suddenly change."

And Peter Merton, deputy underwriter at Kiln, adds: "The single risk is what we focus on and, at Lloyd's, we are experienced in dealing with adverse selection on a daily basis. I see the credit insurance market growing and, in our case, since we deal a lot with banks, business will be fuelled by Basel II requirements."

It seems trade credit insurance underwriters will seek opportunities even when markets are challenging. It will certainly take more than talk of a global credit crunch to knock those operating in the UK off their stride.

WAITING TO BE PAID - WHO'S BEST AND WHO'S WORST?

In its 2006 Payment Practices Barometer, Atradius asked companies how many days, on average, it took their foreign business partners to settle their debts. The figures supplied are the median.

Germany: 30

The Netherlands: 34

Belgium: 45

Great Britain: 45

France: 60

Italy: 90

Source: Atradius.

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