Export credits: Private insurers step out of the shadows

With their huge capacity and state backing, ECAs for many years dominated the market for absorbing risk on longer-dated export credits. That’s changed, say private insurers, who argue the ECA mantra of only providing coverage that the private market can’t handle no longer holds true. Helen Castell reports.

While 10 or 15 years ago, it was “reasonably true” to say ECAs and private insurers operated in different areas and that ECAs had a higher risk appetite and absorbed ‘non-marketable’ risk, that is no longer the case, says Charles Berry, chairman of broker BPL Global.

“Today, ECAs sometimes write risks that cannot be covered by the private market,” he says. “That’s a big change – ‘sometimes’ is very different to ‘only’.”

In terms of willingness to cover high-risk deals, the private market often has a higher risk appetite than ECAs, he argues. Private insurers, not ECAs, are “the market of last resort in the export field,” he says. “Ironically, often we only get to see the business that the exporter’s ECA doesn’t write.”

When EU ECAs say that they only write non-marketable risks, they use the EU’s definition: short-term business in the EU and a handful of OECD countries such as the US and Japan. 

That, however, makes 90% of BPL’s private market portfolio ‘non-marketable’, Berry notes. “The terminology is misleading. Our market is very much in the same space as the ECAs, covering areas of risk that are marketable, but not ‘fully’ marketable.”

Berne Union members’ top ten countries for medium and long-term risk also carry an average OECD country risk category of 3, compared with category 4.5 for BPL’s. That suggests the private market has a larger portion of its exposure in the higher-risk countries than the ECAs, he says.

In terms of tenor, BPL’s portfolio also “looks very like those of the ECAs” with over 60% medium and long-term (MLT) business, Berry notes.

Private insurers’ risk appetite is strong, agrees Frederic Bourgeois, managing director, UK & Ireland, for Coface. “Markets where we are really closed are very few and far between. Even in Greece, we have offered lines to some clients.”

One of the challenges currently facing private insurers is that some corporates have a “very different view to trade credit risk than four or five years ago,” says Grant Williams, political risk director at Coface. In the UK, “many domestic players are almost ignoring risk.”

This is unwise. Although the outlook for the UK appears relatively rosy, “what we’re seeing in practical terms – payment delays and defaults from corporates – paints a different picture,” adds Bourgeois. “Notifications are starting to pick up and UK corporates are starting to feel the pinch.”

Because of this, premiums for private insurers will likely start to rise in six to 12 months’ time. “I think the market is ripe for a turnaround.”

Capacity and pricing

The main constraint that private insurers face in covering long-dated export credits is not their appetite for risk but the fact that their aggregate capacity remains small compared with ECAs’ government-backed balance sheets.

While Berne Union ECAs run some $30 billion of medium and long-term exposure in top export credit markets like Brazil, Angola or Turkey, “if the private market has between $5 billion and $10 billion of aggregate MLT exposure in these countries, it’s beginning to reach its limits,” Berry notes.

For this reason, ECAs will continue to take the “lion’s share” of MLT export credit business in most markets.

This scarce aggregate country capacity also means private insurers are often unwilling to compete on price in the main export credit markets, and match the ECAs’ OECD consensus rates.

This raises an interesting question, says Berry. If the private market is offering cover, albeit at higher rates than ECAs’ OECD consensus rate offers, should an ECA withdraw its support?

They shouldn’t and they don’t, but that makes it difficult for ECAs to deny they compete with private insurers, he says. “Where policy makers say ECAs should only write business that the private market cannot, they clearly have not thought through this dimension of price.”

Each ECA is different

There is of course a huge variance in the extent to which individual ECAs compete with the private market and this is in slow but constant flux.

“Each ECA has its own political and economic agenda, which might be quite different from its neighbour,” notes Olivier David, head of special products – trade credit and political risks at Atradius. “These agendas evolve over time and over governments, while the private market insurers’ approach is more constant.”

Some ECAs have a clear and long-standing policy not to compete with private insurers.

When exporters seek coverage from the ECA division of France’s Coface, for example, they need to confirm on their proposal form that they have first approached the private market, David says. “That’s a clear statement, although I do not know the degree to which it is enforced.”

UKEF’s support of SMEs does not put it in direct competition with the private market, says Williams. Although SMEs will occasionally seek single-contract cover from private insurers, the small size of the transactions – for example £15,000 to £30,000 – tends not to be cost effective for either the insurers or the corporate. “That’s the role UKEF serves, alongside the few markets with no private cover,” he says.

The export credit insurance market also tends to be driven by brokers, who don’t find it viable to dedicate time to transactions of this size, adds Bourgeois. This means such enquiries rarely find their way to private insurers.

Germany’s Euler Hermes, meanwhile, views private insurers’ large offering as irrelevant, David believes. “It rejects the fact that the private market has evolved and is ready to offer several hundred millions of euros of capacity per risk and tenors beyond 10 years. It hides behind the long-outdated EU definition that risks beyond 12 months are seen as non-marketable.”

The German ECA also enjoys a competitive advantage over private insurers that David says is unfair. Because it labels its cover as a guarantee rather than insurance, exporters do not have to pay the 19% tax that is levied when they tap the private market for the same cover.

US Ex-Im Bank is “a different animal again.” It focuses on two opposite ends of the insureds: the giants of the air-space industry that private insurers would unlikely have the capacity to serve and, because of its “political agenda,” on the smallest SMEs that are not economically viable for private insurers. US Ex-Im is therefore “not really a competitor” to private insurers but a true complement, David says.

Targeting different business by necessity

Private insurers’ limited capacity for any one country, combined with their reluctance to use their capacity to compete with ECAs head-to-head on price, means they often target business that does not qualify for ECA cover.

There are whole areas of business that ECAs are not interested in, including prepayments, structured trade, secure working capital loans to commodity exporters in emerging markets or untied loans, notes Berry.

One area where ECAs and private insurers tend not to find themselves competing for the same business is in shorter-dated export credits. Here at least, the traditional dividing line appears to hold.

“Most of the trade insurance in that market is covered by private insurers, and in the UK at least, the traditional government agency would pick up the bits that are not commercially viable for the private sector,” says Dirk Kotze, head of UK risk at Euler Hermes.

The value of trade credit limits underwritten by Euler Hermes for UK and Ireland-based exporters totalled €44 billion at the end of January, covering 115,000 buyers internationally.

While Euler Hermes’s private business covers short-term trade invoices, state-funded ECAs typically focus on projects with longer tenors, he says.

Competing on service

Where private insurers can offer ECAs a run for their money is the quality of service they offer, argues David.

Private insurers can review documentation and make a decision far more quickly than an ECA. They also offer tailor-made coverage, with pricing, wording and analysis specific to each risk. In contrast, policy wording with ECAs is often fixed.

In a post-Financial Crisis environment, some private insurers also bring higher credit ratings to the table than the states behind some ECAs, he notes. This means banks can enjoy better capital relief through private insurers than they might with certain ECAs.

Euler Hermes, for example, has an S&P rating of AA-, which offers a “good level of security to a funder,” says Kotze, adding that that cover is increasingly linked to the provision of finance.

The relationship between ECAs and private insurers can also be symbiotic. Risk-sharing can be advantageous for both, especially on bigger transactions, and a portion of ECA business is re-insured through the private market on a facultative basis. Some ECAs regularly re-insure risk this way.

The margins that insurers earn in those cases are however “quite thin” compared with insuring directly, says David.

In emerging markets, though, licensing restrictions limit access and therefore the main avenue has to be via ‘fronters’. For example, “almost the only way to insure exports out of China would be to re-insure its ECA,” he says.

The mix works – but acknowledge it

Ultimately, ECAs are most of the time a good complement to the private market, says David. “We all have a part to play in enabling global trade, and in adding value to exporters’ business”. 

Having two groups of insurers supporting export credits is good for clients and creates competition, agrees Berry, whose main gripe is that ECAs fail to acknowledge it a such.

“I’m not suggesting that because ECAs and the private market are operating in the same area that ECAs should withdraw from the market,” he says.

“This mixed market can open real opportunities for clients, including risk sharing between ECAs and private insurers, which we very much support, provided it comes about in a way that does not restrict choice or limit competition,” he adds. “We still need ECAs. They should, however, recognise that they are simply part of a market.”

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