TCI on the Rise

With more than 10,000 Canadian companies purchasing trade credit insurance (TCI) as a specialist insurance line, the market is seeing strong growth. Consider that direct premium volumes are up 8% for both 2014 and for the first half of 2015. The upward trend in premium volume is well ahead of Canada’s growth rate and above the average growth rate for TCI worldwide.

It is currently a buyer’s market, with fierce rate competition among carriers. Rates have trended down for the past five years, while coverage levels are above those of the 2007 peak.

Credit insurance protects against the non-payment for sales to business customers (buyers) as a result of insolvency or protracted default. Additional cross-border political risks are also covered. Political risks can be defined as when political events or government decisions within or between the country of the seller, or the buyer of the goods or services, prevent contract performance or payment.

This is essentially a financial risk on accounts receivables, which typically represent 40% of the balance sheet. This asset is increasingly valued as the engine of cash flow and working capital, a principle source of funding and profitability.

LOSSES ARE TRENDING UPWARD

Figures from Canada’s nine licensed trade credit insurers, including Crown Corporation Export Development Canada (EDC), show a marked increase in incurred losses on Canadian policies.

Numbers posted by the Office of the Superintendent of Financial Institutions and EDC indicate that the net premium/loss ratio for Canadian insureds (after reinsurance and adjustment fees) hit 105% in the first half of 2015, after more than $111 million of claims were incurred. This is just $17 million less than for all of 2014.

The three largest insurers by size had loss ratios of 122%, 124% and 85%, respectively.

Contributions to these numbers include the insolvencies of U.S. Steel Canada and Target Canada, the commodity and currency crosswinds in global trade, and the political risks blowing out of Russia.

Insurers report an increase in non-payment notifications in China and claims being filed across a number of important trade sectors throughout the Americas, especially within Brazil, Mexico and Canada. It should be noted that losses can materialize as long as six months or more from the date of the event when they are incurred.

Canadian domestic claims are understated, since international insurers also underwrite risks within Canada for customers located outside of the country.

PRICING OUTLOOK

Pricing and terms offered in the marketplace are not indicating any marked tightening in underwriting at this point, but vigilance is increasing.

Andreas Tesch, president of the International Credit Insurance & Surety Association (ICISA), a private sector trade body whose members had more than US$8 billion in premium in the last full reporting year, said in a press release this past June “the drop in average premium rate demonstrates the fierce competitive environment ICISA trade credit insurance members operate in.”

Tesch further noted “members’ results continue to improve and exceed pre-crisis levels, with a 34.6% higher premium income and 29.1% higher insured exposure.”

EDC, Canada’s largest credit insurer, had a 31% higher average premium rate in 2010 and premium volume 18% higher than it was at year-end 2014. The Canadian private carriers tend to track slightly below this average rate.

MARKET CHANGE, NEW ENTRANTS

More new carriers and one or more managing general agencies (MGAs) are expected to be operating in Canada within the next year or two. High levels of activity are taking place in the Lloyds market for traditional trade credit, specific transaction (single) risk and the rapidly growing supply chain finance channel.

Lloyds has added a huge boost to global capacity and has more than 47 participants offering TCI through licensed brokers. For example, Red Rock Insurance Services is a Canadian MGA for Kiln, a Lloyd’s syndicate.

In addition, Zurich Canada commenced underwriting in Canada in late 2014 and more recently, Great American has commenced underwriting trade credit in several provinces within Canada.

There is more product differentiation than ever – some single carriers can offer traditional all-sales cover, named account cover, single risks, excess of loss, political risks and supply chain finance products. Coverages are emerging for new business-to-business exchange payment-type risks, as well as for the underinsured agricultural sector and, significantly, for the energy sector to cover additional elements of mark to market risks.

SME SEGMENT

Insurers in Canada have hit hurdles in cost recovery and distribution when targeting the small business segment. Technology is improving dramatically.

Catching smaller growing companies is important for most specialist carriers. The SME segment is generally looking for working capital solutions as well as risk transfer.

Finance companies such as Bibby Financial and other asset-based lenders are providing funding solutions enhanced with separate credit insurance in a segment where larger banks have been less aggressive in deploying their capital.

TECHNOLOGY-DRIVEN CHANGE

Companies such as Euler Hermes, Atradius and COFACE are offering complete online toolboxes for customers. For example, beyond general policy maintenance and filing capabilities, the portals offer module choices with multiple filters for information and custom reports. Drill-down menus enable multiple views of risk decisions and risk ratings for buyers (on a portfolio, group or individual level) and countries, risk acceptance and policy performance.

These platforms are enabling more customers to extract a lot more value and transparency from their insurer.

Some reporting tools can be enhanced to work within an insured’s receivable management system to calculate cover and exposure in real time and to generate alerts. Detailed cover reports can be generated on receivables that are being financed, as well as for financial reporting and risk management.

Currently available technology means significant information cost savings can be made. Pricing for detailed written credit decisions on large exposures or simple “Yes/No” coverage written for smaller limits is often less than from traditional information agencies.

Insurer databases consist of multiple source inputs, including their “close-to-purchaser” risk analysts operating locally in many countries. In addition, important delinquency information is continuously supplied by the vast pool of insured customers that report late payments and file claims to help sellers avoid potential loss.

NEW PROVIDERS COULD DISRUPT

Following developments in modernizing the general property and casualty insurance arena, several “software as a service” (SaaS) companies are growing in influence in the TCI market. They are enabling new entrants to rapidly build scale and efficiency in risk management and complete policy management platforms.

While insurers and MGAs are increasingly attracted to specialist risk classes, such as trade credit, for higher returns and diversification, several brokers are developing their own software platforms with enhancements. For example, RKH in London has pioneered a capacity reservation website for structured credit and political risk solutions.

Corporates and financiers increasingly want their own modules that are capable of separating credit risk data systems, insurance and receivables finance functions, and then integrate them with their enterprise risk management (ERM) systems. Others want to control the degree of dependency on any one insurer’s system and be able to add to all of them. Specifically, corporations are aiming to arrive at very precise total cost of risk propositions priced into the point of sale that they can build into the supply chain.

EVOLUTION

Real-time dynamic information may also lead to more efficiency throughout the TCI reinsurance market since there is limited actuarial data of true capacity usage by insureds versus total potential exposure on the insurers’ books. Pricing closer to actual usage could free up capacity and reduce premium rates further.

This market is well on its way to evolving more dynamic pricing models and service platforms. These could serve to attract new capital to the market and reduce costs further.

Creating new opportunities from the important trade receivables asset pushes deep into the finance and supply value chain. This trend is very positive for expanding the market and should deliver new premium volumes.