Credit insurance – the new realities of risk in today's global economy

By Mark Attley

In the current economic environment credit insurers are dramatically reducing their exposures and governments are examining the role they can play to assist the credit insurance market to keep trade moving. How did we get here?

As is happening with risk assessments on the debts of many corporations and even governments, good times tend to cause us to take our eyes off the ball. In the case of credit insurers, good results at the beginning of the second millennium created an environment where market share was King and underwriting principles suffered.

A common refrain we hear in the credit insurance business is, “What’s the point in buying credit insurance when insurers bail out on their obligations when the market gets tough”? It’s true that insurers are very closely scrutinising their exposures, but then so is everyone and especially businesses that have not seriously or recently reviewed the quality of their customers’ credit.

It is very important to understand that credit insurance is not an investment decision for which a return is expected. Insurance of any kind is there to protect against the unexpected loss, not those that are expected.

Consider the following. Based on the 2007 annual reports of the top four credit insurers in the world (EulerCofaceAtradius and CYC – part of the Atradius group), these insurers reported a combined revenue of 5.21 billion Euros. The insurers' consensus, based on conversations I have had with senior credit insurance executives, is that the worldwide claims ratio for the credit insurance industry is in the 70 – 75% range with some countries well in excess of this number.

If we assume 2008 revenue is similar to 2007, this means the four main credit insurers will pay in the order of 3.5 to 4.0 billion Euros to settle insolvency, protracted default and political risk claims – hardly a number you could use to accuse the industry of not fulfilling its obligations.

The real issue here is that in good times many businesses forget the fundamentals, and our industry is now adjusting to today’s realities. Despite the worst economic environment in decades, the cost of insuring credit risk is still 30% to 40% below where it was five years ago. Of course this isn’t a sustainable business model, and so the cost of underwriting risks is rising.

(Mark Attley is an ICBA Canada broker and President of Millennium CreditRisk Management credit and political risk insurance specialists – www.mcm.caICBA is the world’s largest team of independently-owned, specialist trade credit insurance brokerages. Partners combine local service with global coordination to provide credit and political risk insurance solutions for multinational companies.)