In a world where roughly 15% of trade is protected by insurance, eyes are often on the trade credit insurance stage.
The credit political risk insurance (CPRI) industry helps lenders and corporates with lending capacity and regulatory capital risk. Credit insurance underpins global trade and finance, managing both concentration risk and country limits.
By Carter Hoffman
Last modified Thursday October 6, 2022
In a world where roughly 15% of trade is protected by insurance, eyes are often on the trade credit insurance stage.
The credit political risk insurance (CPRI) industry helps lenders and corporates with lending capacity and regulatory capital risk. Credit insurance underpins global trade and finance, managing both concentration risk and country limits.
Amid today’s global uncertainty, managing commercial and geopolitical risk in trade transactions has been paramount.
To discuss these challenges and the broader risk insurance landscape, Trade Finance Global’s (TFG’s) Deepesh Patel sat down with Gary Lowe, global head of the Global Credit Insurance Group at Standard Chartered, Jérôme Pezé, CEO at Tinubu, Janusz Władyczak, CEO at KUKE, the Polish export credit agency (ECA), and Richard Wulff, executive director at ICISA.
The macroeconomic and geopolitical turmoil in the world is having a large impact on risk landscapes in the trade credit insurance space.
According to Janusz Władyczak, this makes the risk-mitigating services of trade credit insurers and ECAs all the more important, especially for medium- and long-term trade and project finance transactions.
This is because the traditional risk environment is changing.
“There are many countries that we have viewed as quite safe throughout history, but nowadays we cannot be sure if they’re still in the same situation,” Władyczak said.
“This is something which is a huge issue for developing countries especially.”
Rising interest rates and soaring inflation have been troublesome for developed markets, but the situation is much worse for developing nations.
This is because currencies in developed markets, such as the US, are generally viewed as a safe haven during periods of uncertainty, leading many investors and speculators to trade more perceptibly volatile currencies, which are often from developing countries, in for them.
As a result of this, the so-called hard currencies are appreciating in value against developing currencies.
This means that, even with all else being equal, underwriters need to consider projects in developing regions as bearing more risk than they otherwise would have.
This changing risk landscape is prompting many organisations in the space to look towards partnerships and collaborations as a means of serving the market.
Gary Lowe said, “Bringing insurers on a journey with us as the bank, who has the origination relationship with the underlying customer, is incredibly important.
“You can’t be short an insurance contract or long an insurance contract and short the underlying – these terms simply don’t have any meaning in our market like they do in many others.
“This is about partnerships, risk sharing, and a long-term journey.”
This sense of collaboration is not limited to private businesses, many multilateral organisations and export credit agencies are also leaning into partnerships to better serve clients.
“There is definitely a trend among ECAs and all market players towards an increased willingness to cooperate to mitigate risk,” Władyczak added.
“Everyone wants to share the risk and that’s what is really happening.”
To examine why partnerships and risk-sharing arrangements are widely beneficial, it pays to look at a recent example from Standard Chartered.
The bank recently closed a billion-dollar transaction with a government entity that was looking to undertake an infrastructure water development project.
Despite the immense public good that this project would bring, it was CCC rated, meaning that it would be far too risky for any institution on its own, given the large price tag.
The facility was structured using multiple tranches:
Given this ability to come together and share risks, a collaborative financial market was able to bring this facility to life.
Due to the nature of the project, in the long term, this has the potential to deliver clean water to countless thousands of underprivileged members of the global community.
As Gary Lowe said, “It’s that long-term partnership that has been incredibly important in enabling the market to broaden its horizons and spread its wings.”
The macroeconomic events are also having a hand in shaping the way that insolvencies are playing out across the market.
During the COVID-19 pandemic, there was a sharp decline in the number of insolvencies, largely due to the massive flow of money entering the economy in the form of government support.
Bankruptcies in Europe, for example, fell from an average of 350,000 per year to less than 200,000.
This drop, however, does not represent a shift in the actual underlying veracity of business, but rather a delayed market response as a result of readily-available support funding.
“We are going to have to face the fact that there will be a catch-up effect in terms of insolvencies,” Jérôme Pezé said.
According to research from ICISA members, global business insolvencies are expected to rise by around 10% in 2022 and around 14% the following year as more and more countries end their COVID-19 support programs.
This is not just a localised phenomenon but is happening globally.
In many Asian countries, practitioners are beginning to see the value of trade debts outstanding and the number of days required steadily rising, which is going to cause stress throughout the whole supply chain as liquidity tightens.
“It’s like when you dance in a long line,” Richard Wulff said.
“If the start of the line varies a little bit, the end of the line varies a lot, and that’s what we’re bracing ourselves for.”
Carter is a Research Associate at Trade Finance Global focusing on the impact of macroeconomic trends and emerging technologies on international trade. He holds international business and science degrees from the European Business School in Germany as well as Brock University and Queen’s University in Canada where he served as the director of operations and finance for the student executive council and as an operations associate for the Queen’s University Alternative Asset Fund. Carter’s work has been featured in publications and articles supported by the SME Finance Forum, managed by the International Finance Corporation, World Trade Organization, and International Chamber of Commerce. Carter is a graduate of the Trade Accelerator Program (TAP) through the Toronto Board of Trade and the head of international business development at the Canadian-based building supply exporting firm, The Great Egress Co. He is also a Certified International Trade Professional (CITP) and a member of the exam development panel for the Forum for International Trade Training (FITT) where he developed exam questions for the update of the CITP Professional Exam as part of FITT’s application for ISO 17024 Accreditation.
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