Bridging the gaps of ECA long-term reinsurance activities and public procurement needs
Interpreting public procurement rules is a complicated business. Here is a guide to how to go about unpicking the complexities of regulations and processes and interpreting how ECA reinsurance can be used in conjunction with public procurement
The Berne Union estimates that $45 billion of exposure has been placed in the private reinsurance market (treaty and facultative) by ECAs. Collaborations between governmental ECAs and privately owned credit and political risk insurers are increasing. ECAs usually follow procurement principles when appointing a broker. Some are now even considering the need to procure private reinsurers. But the regulations and processes are complex. The interpretation of public procurement rules is a key topic on ECAs’ agendas, and ECA reinsurance in combination with public procurement is mainly unchartered water. Each country and ECA has its own national regulations/interpretations. Therefore, we want to sort out some of the principles and challenges ahead, given our experience gathered over the last couple of years.
The key procurement principles?
The core principles of public procurement are designed to achieve a competitive and open procurement market:
- Equal treatment
- Open competition
- Sound procedural management
The table shows the procedures usually applicable to ECA reinsurance activities.
“In my native Finland, implementation rules take into account the special features of procuring credit and political risk reinsurance. Finding risk mitigation is often time critical, which goes against the timeline of procurement. When buying facultative cover, one must reveal customer confidential information which is forbidden by law. Therefore, general procurement rules cannot be applied. The procurement of reinsurance broker services is often considered subject to public tender.”
Topi Vesteri, ECA & Export Finance Advisor and former President of the Berne Union
Some ECAs have taken a step back from reinsurance activities, due to the burden of the procurement rules, and lack of procurement experience.
What to consider before starting a procurement process
In short, time, confidence and proper planning will be of great help. Navigating through the public procurement process is a serious project management undertaking. Do not underestimate the workload and mobilisation of resources this type of project requires of the ECA internal teams, brokers and reinsurers. Designing and carrying out a fully compliant procurement process is both time and resource consuming. If not managed correctly, it can lead to an over-engineered and costly process, with a sub-optimal outcome that could ultimately jeopardise the ECA’s reinsurance activities.
The minimum timescale to receive bids from tenderers (economic operators) is 35 days (Art. 27 of the EU directive), with an additional 10 days for the standstill period. In practice, the entire tendering process, from drafting to signing the Framework Agreement, generally takes significantly longer than anticipated.
The outcome of the process must be understood by all stakeholders. The ECA should be confident it won’t be challenged with the way the process was handled, and with its outcome.
Engaging with the market
ECAs are strongly encouraged to conduct market consultations (Art. 40). In our opinion, engaging with market players (bidders) will help the ECA understand the complexity of the process, the level and type of services they require, and contribute to drafting a more effective tender. This is not intended to challenge public procurement principles – all potential bidders should still be treated fairly and equally at all times.
“Wise ECAs use private reinsurance to actively manage their portfolio and do so with through the services of a reinsurance broker. Active reinsurance buyers usually complete a handful of transactions each year. They collaborate with private reinsurers and do not crowd out the private market where it is able and willing to take risk.”
How does an ECA procure its broker?
Step one – ECAs looking to appoint a broker usually go through either a formal tender process or at the very least a form of ‘beauty contest by invitation’ where brokers pitch to the ECA.
Step two – The ECA and the winning broker(s) sign a Framework Agreement laying out the terms and conditions of the cooperation. The term of the Framework Agreement is usually four years, but the EU Directive stresses that it can be extended (Art. 33). It is indeed up to the ECA to interpret what term is needed and best suited for them.
The heart of the tender will be the selection and awarding criteria chosen by the ECA (Art. 57, 58 and 67). The selection criteria define the minimum requirements to participate. The award criteria are a combination of price and qualitative criteria.
How does an ECA go about awarding the tender to a broker?
According to procurement rules, the most economically advantageous bid should be awarded. This can be assessed based on (i) a price only approach, (ii) a cost-effectiveness approach, or (iii) a best price-quality ratio approach.
In practice, deciding which approach to use is the most complex task when drafting a tender. Most ECAs will find that the term ‘most economically advantageous’ remains tricky to define accurately.
The balancing act of quality versus price
The ECA should balance which criteria are given the most weight in the awarding process. This will shape the quality of bids, service levels, relationships and broker engagement during the term.
Art. 69 of the Directive warns against abnormally low bids. Abnormally low prices should be justified by the bidders to the ECA, who can reject the bid should the explanation not be satisfactory.
Should the ECA also procure the reinsurers?
Currently, some public bodies do tender insurance purchasing. This type of procurement is however more common in Property & Casualty, and to a lesser extent Marine, Aviation and Environmental.
The private market is very immature with regards to tendering for complex long-term credit risk. This type of procurement has been done before, yet a significant education process of the reinsurers is still needed. Procurement puts a burden of proof on the reinsurers (bidders), even before they consider the transaction at hand. The additional layer of complexity for a reinsurer to participate can be cumbersome from a compliance perspective. Quite a few reinsurance companies will be hesitant to engage in it.
As such, the selection and award criteria should be designed to encourage rather than dissuade reinsurers. It is also important to consider the proportionality of certain questions in the selection process and their relevance to the procurement.
Keep your eyes on the prize – the ECA, together with the broker, should look to develop an outcome led procedure.
As stated earlier, focusing purely on procurement runs the risk of engaging in a substantial project management exercise, rather than capacity creation on the best commercial terms for the placement. Formal procurement for Treaty placements will prove even more challenging, due to uncertainty of the pipeline at the time of the tender. On the other hand, facultative transactions are known from the start, which gives the bidders more visibility when deciding whether to participate in the tender.
Long-term credit reinsurance is furthest possible from an off-the-shelf product.
The preparation of the tender is by far the most important part of the process. The decisions made during this phase will shape the success of the entire procedure. The purpose here is to
- Identify the needs and define the end purchase/contract
- Understand reinsurers’ willingness to go through the extra tender layers
- Identify internal stakeholders’ requirements
- Prepare the timeline of the project
- Understand reinsurers’ interest to participate in the underlying risk
The ECA should choose a procurement procedure reflecting the type of reinsurance activity and frequency they would like to engage in.
The key is to balance the need for appetite in the market on the best possible terms, and to create a simple and transparent procedure paving the way for the appropriate market participation.
Lessons in brief
- Reinsurance combined with procurement is a complex process that can easily be overengineered. It is critical for all parties involved, specifically the ECA and the broker, to be very well versed in the topic. The broker must be able to demonstrate that they understand the obligations and can handle the ECA’s requirements. The ECA, as the contracting authority, is the ultimate risk taker in this process.
- Carrying out a fully compliant reinsurance procurement is feasible but very much still in its infancy. The ECA must consider time, commitment and cost of this project, as well as commercial outcome.
- Whether the ECA decides to (i) procure the broker, or (ii) procure both broker and reinsurers, reinsurance requires strong collaboration and teamwork. The ECA should consider the type of relationship and services they wish to get from the reinsurance marketplace.
The role of the broker has evolved, and market dynamics are ever changing. Demonstrating excellent reinsurance knowledge, deep understanding of ECAs, capacity for innovation, expertise on procurement rules and project management skills is now a natural part of the job. The competent public sector broker of today is a juggling multi-tasker.