State of the industry: Committee chairs and vice-chairs offer their insights

Volumes of export credit and investment insurance reported for 2015 by Members of the Berne Union decreased by 7% to reach a total amount of $1.865 trillion. But Berne Union members still supported about 11% of international trade in 2015.
3 min

Reported business trends

Volumes of export credit and investment insurance reported for 2015 by Members of the Berne Union decreased by 7% to reach a total amount of $1.865 trillion. But Berne Union members still supported about 11% of international trade in 2015.

Within the aggregated new business figures, the value of new export credit insurance cover reported in the Short Term (ST) Committee was $1.586 trillion, the reported value of new cover provided by official export credit agencies (“ECAs”) in Medium and Long-Term (MLT) Committee amounted to just over $154 billion, the new business reported within Investment Credit Insurance (“INV”) Committee was $97 billion, while the Prague Club Members reported $2 billion new cover issued.

Total claims paid by Berne Union members during 2015 amounted to $6,271 million, an increase of 35% compared to 2014, while recoveries decreased to $2,776 million (-10%).

The Berne Union continues to pursue its initiative to revise the existing data reporting mechanism and to develop it further in order to provide better information to its Members and the stakeholders of the industry, such as international organisations, regulatory bodies and financial institutions.

Short-term export credit insurance business

Short-term business represents insurance of exports with repayment terms of less than one year – often 30, 60 or 90 days. These transactions are typically shipments of consumer goods and natural resources, with the movements of ST export credit insurance closely linked with the ups and downs of the broader global economic environment and market price levels.

The volume of ST export turnover insured by Berne Union members shrank by 7% in 2015 to $1.586 trillion, breaking the trend since the recovery from the global financial crisis and mainly due to the figures reported by the private Members. The insurance capacity provided by Berne Union members, measured by the value of credit limits approved, just dropped below $1 trillion after three consecutive years, as the aggregated value ($985,045 million) was 6% lower than at 2014 year-end.

ST claims paid by Berne Union members to indemnify exporters for defaults on their trade receivables rose from $2,019 million in 2014 to $2,584 million, which is a drastic 39% increase, but the overall default to turnover ratio of 0.163% continued to reflect sound underwriting practices. Based on the data reported, ST loss ratio (i.e. claims paid as a share of the premiums earned) for Berne Union members continued to increase, now standing at about 70%, after 53% in 2014.

The highest volumes of ST claims paid per country in 2015 resulted from defaults in Russia ($236 million), Brazil ($205 million), Venezuela ($202 million), USA ($161 million), followed by Saudi Arabia ($150 million).

The growth rate of global trade has been lower than that of the global economy for five consecutive years ever since 2011, and there seems to be no obvious signal of resurgence in the next half or one year, as the recovery of the global economy is still facing headwinds and uncertainty. Although turbulences in certain markets/regions could create opportunities for credit insurers to a certain extent, a more or less stable trend is expected in short-term business.

In terms of the commodity sector, the presently low trade margins have an influence on the pricing of short-term export credit insurance. The volatile market is expected to remain and the pressure on pricing likewise.

A key element of success in the future will be innovative product development to meet changing demand arising from various new trade and finance models, e.g. e-commerce companies making their whole trading process (purchasing, logistics, selling, etc.) internet-enabled or fintech solutions that challenge the traditional trade finance world, impacting both financial institutions and insurers.

A close cooperation among Berne Union members will proof to be very valuable to expand and adapt to the needs of the rapidly changing market.

Medium and long-term export credit insurance business

The MLT statistics of the Berne Union capture export insurance coverage provided by official state-backed ECAs only. Alongside the core insurance business, some ECAs also finance medium and long-term transactions, which amounted to 6.9% of the new business and 9.4% of total exposure reported in 2015.

New business covered in 2015 decreased by 7% (to $154 billion) compared to 2014, although the portion of sovereign and public buyers has significantly increased. The total exposure of ECAs reached $708 billion at the end of 2015, showing a 1.1% increase versus 2014.

Claims paid to customers by ECAs under MLT transactions amounted to $3.251 billion in 2015; an increase by 51% compared to the level of defaults in the previous year, while claims paid for political risks have considerably increased by 78%.

There was no change noted for the top five countries responsible for claims payments, with the highest amounts of claims due to defaults in Russia (1,448 million, Iran ($374 million, halved compared to 2014), USA ($301 million), Brazil ($192 million) and Ukraine ($168 million).

Comparing year-end recovery volumes, 2015 levels decreased by 3% ($2,323 million) on 2014, but comparing half-year figures, 2016 shows a promising trend, with ECAs recovering 74% more claims in the first half of 2016 than in the same period of the previous year ($2,249 million), almost reaching the annual results of 2015 already.

2016 will be a momentous year in the Berne Union history: the merging of the Prague Club into the Berne Union at the spring meeting in Warsaw saw the birth of an organization of over 80 members from 73 countries.

While this is certainly a historic event, from the point of view of MLT business, and judging from data and comments as of May, 2016 may well be a transition year when it comes to new business. Total figures for the year 2015 were already below previous years’ levels, and we saw in May, an almost even split between ECAs who were reporting a drop in new business and pipeline and those who were seeing an increase. Amongst the reasons explaining the decrease, we can mention the drop in oil prices, the situation in Brazil, Russia and other regions where growth prospects have been revised downwards, a reduction of large-scale export contracts, etc. All of the reason which explain the downturn in business for 2015. We need to keep in mind, however, that ECAs were coming from exceptionally high levels of activity during the years since the global financial crisis, and that one of the traditionally largest player, US Exim, had its own 'domestic' challenges during a part of 2015.

The impact of the downturn can also be seen in what looks like a reversal of a long series of years with very limited and manageable levels of claims. While overall figures are still relatively low compared to exposure levels, 2015 saw a sharp increase in claims, both commercial and political in nature; an increase which we may see prolonged into 2016.

Despite this somewhat gloomy picture, as the new MLT Committee Chair and Vice Chair, our focus at the meetings so far has been to increase the level of members' engagement and to add some new initiatives alongside the regular agenda. Our first opportunity was in Warsaw, May 2016, where we introduced an Oxford Debate session and a new MLT Deal of the Year contest. ECAs have embraced these initiatives enthusiastically, with SACE our first winner while both Sinosure and EDC contributed a lot to the session. Overall, the exchanges at the Warsaw meeting were interesting and informative and the overall impression was that despite difficult market conditions, ECAs will continue to adapt their products and programmes to rise to the occasion.

Investment insurance and other cross border risk insurance

Under INV, Berne Union members report credit insurance for overseas investment against political violence, expropriation, transfer and convertibility risks; non-honoring of sovereign obligations credit insurance products, providing cover against the inability or unwillingness to pay by sovereign and sub sovereign obligors; and all other typical credit insurance protection against political and commercial risks for bonding, untied loans and export credit not insured by official ECAs.

The overall investment insurance portfolio grew by 7% compared to 2014, with the final result of $258 billion. With the minor decrease in the volume of new cover provided (-2%) and still almost $100 billion of new transactions ($98 billion in 2015), it seems the average tenor of recent transactions has not shortened any further. It is worth noting that new cover provided for investment and state obligations grew more than 10% in 2015, and the largest growing portfolio is of the credit insurance of state obligations, growing 35% from $29 billion in 2014 to $39 billion at year-end 2015 and developing further to 43 billion at half-year 2016.

The INV Committee Members accounted a low level of claims payments in 2105 ($151 million), 64% less than in 2014 ($238 million).

In terms of classic investment insurance the largest indemnifications occurred in Libya ($34 million), Turkey ($16 million), Russia ($13 million), Vietnam ($5 million) and Ukraine ($4 million). In 2016 so far, only claims paid on Kenyan investments exceeded $1 million.

Within the insurance against non-honouring of sovereigns the largest claims were paid for transactions in Nigeria ($21 million), Malawi ($8 million) and Vietnam ($5.5 million). In 2016 first half, significant volume of claims were paid for transactions in Tanzania ($4.2 million) and Congo ($1.3 million).

Within the remaining line of investment insurance the largest indemnified claims were related to obligors based in China, Russia and Serbia.

In 2015, the recoveries volume was very low (only 14% of the 2014 amount – $11.7 million) and even though the 2016 first half report shows a higher rate (140% increase), it is still below the performance of the previous years.

The Berne Union Investment Insurance Committee, which includes both public and private insurers, currently has 38 members. This mix of membership, with institutions offering not only investment insurance but also credit and other types of cover, provides a diverse and comprehensive understanding of the global risk environment. Also, interestingly, there is an almost perfect correlation between the amount of investments covered and worldwide volumes of foreign direct investment, with about 10% insured by Berne Union members.

Limiting the comments in this article to the core business of investment insurance, the current risk landscape is very much in flux, with two major trends; increased risk in many markets and, at the same time, an increase in capacity among providers. The risk environment is characterized by:

  • An overall relative low claims ratio (claims as a percentage of premium income); an average ratio between 10 and 20% over the last few years, but with marked exceptions, both regionally and sector-wise.
  • The aftermath of the Arab Spring has caused and is still causing considerable claim payments mainly due to political violence leading to loss of foreign investments. Libya, but also other countries, has been severely affected.
  • The conflict in Eastern Ukraine and the current situation in Venezuela are leading to political violence and expropriation claims.
  • The drop of commodity prices also impacts investments and likelihood of claims. Although not yet manifested in claims activity among the Committee members, risk in commodity related sectors, such as oil or mining, is rising as governments may be pressured to expropriate or change terms for investments that are not delivering the expected benefits; conversely, investors may interpret low returns as political risks.

Apart from the perception of increased risk, and perhaps counter-intuitively, the private insurance market is currently seeing a substantial increase in insurance capacity caused by new insurers entering the market, putting pressure both on pricing and policy wordings. This increase can be attributed to the challenging investment return environment (and indeed even negative bond yields); with insurers seeking business with better returns, and investment insurance has traditionally offered returns that are both uncorrelated to and offering higher returns than more traditional insurance lines.

Prague Club members

The Prague Club is the home of emerging export credit insurance companies who are often domiciled in frontier markets. Current statistics on the Prague Club members allow us to assess the performance of both ST and MLT insurance activity. Prague Club business remained strong in 2015. The aggregate portfolio saw growth of 1% in overall business volumes with an increase of 54% for premium levels collected. Claims meanwhile increased by 17% and recoveries by 65%. in detail:

Volumes of new ST business for PC members reached $24 billion in 2015. Premiums earned on ST trade receivables where up slightly on 2014 at $78 million, again reflecting continued steady business in this area. Claims payments relating to ST transactions increased by 35% to $40 million.

Following two years of high growth, MLT new business volumes remained flat for 2015, registering a total of $3.8 million. Premiums earned meanwhile almost doubled in 2015 ($258 million), a reflection of the complexity of MLT transactions and the tendency of pricing to follow the risk level of new transactions. Claims figures for MLT business increased to $244 million in 2015 from $214 million in 2014.

Làszlò Varnai

Associate Director - Berne Union


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