Reinsurance: An ECA point of view
For many years the linkage between export credit agencies (ECAs) to the reinsurance market was related only to their reinsurance treaties or special arrangements under their short-term credit insurance business (STC).
For many years the linkage between export credit agencies (ECAs) to the reinsurance market was related only to their reinsurance treaties or special arrangements under their short-term credit insurance business (STC).
ECAs in general have continued to manage their Medium and Long Term Credit Insurance lines (MLTC) within the framework of their own governments. Not only was that the decision for supporting a MLTC project was made by the government or by its ECA, but taking the risk itself as well was fully governed by the ECA's government, taking the obvious advantage of its "deep pocket". In the traditional world where the majority of credit insurance lines were provided to STC, MLTC was rarely used or mostly used for special projects that were linked easily to government support.
ECA to ECA
The first change was less connected to risk management, as you may have guessed, and more related to national content issues and to the increase in volumes and the complexity of projects. It is quite easy to understand why a government should not have to cover their counterpart country's portion especially if the case does not fit exactly to their national content regime. The obvious first alternative was to split a specific project into portions; however, it may negatively affect the financial structure and costs. The second alternative is to cooperate and nowadays every ECA knows that whenever a major portion of their project is related to another specific country, they are welcome to approach their counterpart ECA for risk sharing by way of reinsurance agreement with classic follow the fortune approach.
ECA to private
The second change was the relatively new activity of the private credit insurance companies in the medium and long-term credit and political risks insurance areas. And especially, their active entrance to the Berne Union as members in the 1990s. Such credit insurers have acted as a bridge between ECAs’ hesitation to use the market's service, and the new needs. When a project has required, for instance, a downpayment loan (15%) in parallel to the ECA Loan (85%), the private members were there to provide coverage. No doubts then that after a while some ECAs have started to cooperate closely with private members, in their own portfolios.
The advantage of private market insurers was always about their availability, speed and flexibility. Among their biggest advantages over ECAs are their ability to cover risks of export finance and trade finance, without any linkage to national content and without any obligatory requirement for downpayment.
However, cooperation through ECA to private reinsurers is still limited. In my opinion it is mainly due to the gap between the cultures. Is the private market reinsurance policy clean enough for ECAs to rely on? Or, what are the exclusions of the private insurer reinsurance? What are the approaches of the private insurer and the ECA with respect to claims process and especially to the Paris Club? Can private reinsurer meet the OECD's premium rates? Furthermore, difficult dilemmas with different answers, those who were able to be flexible, are rewarded with excellent partnerships on both sides.
Types of reinsurance
Structuring reinsurance can be approached in different ways, which should be chosen according to the insurer's needs.
Unlike short-term credit reinsurance, the almost automatic structure for MLTC is to have a quota-share facultative reinsurance agreement toward each insured project, or for several. In such cases the reinsurer follows the insurer's policy, and in case of a claim pays its quota share.
Excess of Loss (EOL) is another good option to use the service of the private market. This is where certain risks are divided into layers. For instance: the first layer of risk is covered by the ECA, the second layer by the reinsurer, and third by the ECA again. In such cases the reinsurer will only be obliged to pay a claim after the entire first loss is paid by the ECA. Taking a decent portion of the first risk by the ECA can be helpful for pricing matters, for handling the policy and the claim process as well. The main advantage for this option is mainly for portfolio risks, or country exposure risk, and less for single risk.
An increasingly popular option is using a treaty for MLT. It may be more useful for relatively large ECAs with a decent amount of MLT projects on a yearly basis. On one hand, the advantage is that the reinsurance process for each insured project is faster as the documentation is finalised in advance and underwriting is done by the ECA solely. On the other hand, a treaty renewal is required on a yearly basis and ECAs are requested to cover whole turnover or a large portion of their portfolio.
ASHRA’s experience with MLT reinsurance
ASHRA is considered to be a small-medium ECA. Using private market capabilities, it leverages its ability to service Israeli exporters and is at the forefront in major projects.
The first time ever that ASHRA reinsured a project with private market involvement was in the early 2000s. At that time ASHRA's (formerly IFTRIC) exposure to Romania and Venezuela was quite high and the political risks of both countries had increased dramatically at the same time. ASHRA and its guardian authority have decided to look for ways to reduce exposure and using a private market player wasn't an obvious choice, at that time.
Since then ASHRA has had some major achievements in the reinsurance field:
- More than 100 projects were reinsured
- More than 30% of the current exposure is reinsured
- Reinsured and insured major ECAs
- Multi-reinsurers' projects
- Excess of Loss reinsurance solution
- Direct reinsurance or through brokers
Bottom Line:
As the requirements for ECAs' risk management are always growing, using private market solutions to reduce or share risks is not a secret anymore. ECAs are still the best partners for banks in their own territory. However, differences in risk appetite and credit tenors are not seen as often, and private market players are highly motivated to cooperate with ECAs and not to replace them.
Adi Gross
Chief Underwriting Officer
