A successful year in a volatile risk environment
During 2011, Berne Union members insured a record amount of USD 1.7 trillion worth of exports – more than 10% of international trade.
Despite the emergence of new significant challenges, it was also a year of good results for most credit insurers, confirming the swift turnaround in the industry after the global crisis of 2008/2009.
However, political changes in the Middle East and North Africa as well as sovereign debt concerns in Europe and the US underlined that the risk environment remains volatile.
Out of the total amount insured, USD 1.5 trillion represented Short Term Export Credit Insurance (ST) in support of exports with a repayment period of less than one year. Medium Long Term Export Credit Insurance (MLT), covering transactions with repayment terms of typically 3-5 years and more, amounted to nearly USD 200 billion. Both short term and medium long term business recorded double-digit growth of respectively 19% and 10%.
The support of credit insurance for world trade was also evident in the amounts of claims paid to insured customers, to compensate them for losses suffered due to defaults by buyers or other obligors. Since the beginning of the crisis in 2008, Berne Union members have paid out USD 15 billion to exporters.
With renewed uncertainty in the global economic and political environment, 2011 was a year for credit insurers to catch their breath and prepare for 2012, which promises to bring its share of new challenges.
Short Term business – strong performance with an outlook for higher claims
Having stabilised in 2010, the ST business of Berne Union members expanded again in 2011, to reach an estimated figure of USD 1.5 trillion (or plus 19%). The vigorous growth in exports insured is above the increase in world trade observed in the first three quarters of 2011.
The insurance capacity provided by Berne Union members, measured by the amount of credit limits extended to exporters at a given point in time, stands at more than USD 880 billion at the end of 2011. This is similar to pre-crisis levels and about 15% more than the low point at the end of 2009.
ST claims paid were low in 2011. The amount of USD 1.3 billion paid out to customers was even below the claims volume of 2010, the year which had seen claims coming down to normal levels after the crisis. This is remarkable, taking into account that insured export turnover, and therefore risk taken on board by the insurers, has strongly increased in 2011.
A word of caution has to be said though: Claims levels were low in 2011, but the quarterly evolution has seen a constant rise throughout the year. While claims paid during the first quarter of 2011 stood at USD 217 million, the fourth quarter showed an amount of USD 471 million paid to customers. This indicates a negative trend with possible higher claims activity in 2012.
The top claims countries for ST in 2011 were Libya (USD 154 million), the United States (USD 144 million), Spain (USD 88 million), Germany (USD 85 million), and Italy (USD 82 million).
In ST, high amounts of claims are typically paid on countries where it is particularly risky to trade or where there is high exposure in terms of business volumes. Libya and the US are good examples: While the claims volumes on both countries were fairly similar, the exposure to Libya was small – just above USD 1 billion at the beginning of the year – whereas the US represented the largest exposure country for Berne Union members – USD 64 billion.
Claims on Greece represented USD 36 million for a relatively small exposure of USD 6 billion. In any case, the performance of ST credit insurers in ST is closely linked to the ups and downs of the global economy as well as to political developments worldwide.
While a year ago a majority of Berne Union members was of the opinion that the very high loss period experienced during the crisis was over, the outlook for 2012 is now for higher claims in a risk environment that has deteriorated again.
Medium Long Term business – ECA cover in high demand
The MLT statistics of the Berne Union capture insurance coverage provided by state-backed Export Credit Agencies (ECAs).
With more than USD 191 billion in 2011, the volume of new MLT transactions insured by Berne Union members reached a record number.
The high demand for ECA cover demonstrates that we are again – or still – in a situation where few, if any, major MLT transactions close without risk mitigation provided by ECAs. This is due to the continued challenging global risk environment, as well as the heightened awareness for credit insurance as a risk management tool. Compared to pre-crisis times, banks have adjusted their risk appetite, and they rely on insurers to carry the risk of obligor defaults.
Claims paid to customers for defaults on MLT transactions increased by 37%, from USD 1.8 billion in 2010 to USD 2.5 billion in 2011. Although only an estimate can be made at this stage, it seems that premium income has significantly increased as well. In all likelihood, the loss ratio for 2011 – claims paid in relation to premium income – should be similar to the one for 2010.
The highest amounts of claims paid per country were paid due to defaults in Kazakhstan (USD 409 million), Libya (293 million), Ukraine (USD 163 million), the Netherlands (USD 114 million), and Sudan (USD 113 million).
The circumstances of each and every claim in the MLT area are specific. Frequently, it is only one debtor who defaults, or one large transaction that goes sour, but this default may impact several insurers. It is therefore difficult to draw general conclusions from the list of top claims countries as above. Having said this, it appears from the list that no safe haven exists, and that ECAs always take significant risk every time they insure an MLT export.
Total MLT transactions under cover in the books of Berne Union ECAs at the end of 2011 amounted to USD 583 billion, the highest level ever, as for new business covered.
More than ever, the support of ECAs appears to be crucial for helping banks to unlock liquidity and enable exporters to trade internationally.
Outlook – is the next crisis around the corner ?
The credit insurance industry weathered the major test of the global crisis of 2008/2009 well. No insurer defaulted, the industry paid out claims appropriately and promptly.
While the year 2010 had seen the turnaround in the credit insurance market, and 2011 had started following the same path, risks are back on the map for 2012.
Indeed, claims paid took an upward trend towards the end of 2011. The uncertainties related to the global economy, as well as to political developments, signal heightened risk as well as new opportunities for credit insurers.
Two years after the crisis, Berne Union members are prepared for a possible return of very difficult times. Internal risk management and processes have been adapted to the new risk environment. Insurance products and communication with clients have been improved, in order to continue serving the needs of exporters.
Needless to say, the pricing of insurance products needs to be commensurate with the risks taken.
A major challenge that impacts the business of ECAs and private market insurers is the current inability of many banks to fund themselves in USD. Especially for MLT exports, this can lead to transactions being put on hold because of a lack of finance.
These hopefully temporary difficulties could be intensified by the unintended consequences of Basel III and Solvency II. Indeed, regulatory changes in capital and liquidity requirements might have a major impact on the ability of banks and credit insurers to support trade.
With new challenges ahead, Berne Union members, public and private credit insurers, will continue to provide risk mitigation and to facilitate global trade flows.