Review of the Communication on short-term export credit insurance Consultation paper QUESTIONNAIRE Name: Robert Nijhout Organisation Represented: International Credit Insurance & Surety Association (ICISA) Location (country): Global operations. Association registered in Switzerland, secretariat based in the Netherlands E-mail address: rob.nijhout@icisa.org Please describe the main activities of your company/organization/association. ICISA was founded in 1928 as the first credit insurance association. Surety companies joined as members since the 1950s. Reinsurance companies involved in these business lines have been joining as members since 2000. Members account for over 95% of the world's credit insurance business and have over USD 2 trillion in trade receivables insured underwriting risks and serving clients on all five continents and in practically every country in the world. ICISA represents the interests of its members towards regulators, legislators and the media. The association organizes meetings, conducts studies and projects, produces industry publications and offers training for the benefit of its members and their staff. Replies given below are on behalf of ICISA members (all private insurers) licensed to operate in the European Union and involved in underwriting short-term credit insurance. ICISA is not in a position to report or comment on medium or long-term business. SECTION A A.1. Supply of trade financing and credit insurance c) by private insurers Please provide information on the structure of the existing portfolio (distinguishing between the short-term and the medium to long-term business) of the private credit insurers and other credit providers over the period 2005-2010. Regarding the existing portfolios we can inform as follows: ICISA EU members insure traders/exporters in more than one EU Member State. Most have offices in multiple EU Member States. Domestic v Export 60-65% of insured short-term risk concerns domestic trade. 35-40% of insured short-term risk concerns exports.
All EU ICISA members offer combined domestic/export policies, representing roughly around 55-60% of total policies. Whether a policy is a domestic or an export policy (or both) depends on which countries the policyholder wishes to insure and not on the type or wording of the policy itself. (For the purpose of this reply, domestic is defined as the buyer being in the same country as the insured seller. export is considered to be trade with a buyer in another country/eu member state than where the insured seller is established.) Whole turnover v Single Risks Of all ICISA EU Members combined, 95% of policies cover the trader s portfolio, either all buyers or buyers in selected countries depending on the client s wishes. Up to 5% of policies insure single transactions. SMEs 67% of EU ICISA members (90% market share) offer dedicated SME policies. Minimum premium per policy ranges from EUR 1,200 to EUR 5,000 p.a., depending on the insurer. Over 90% do not require a minimum insurable turnover. A. 2. Impact of publicly supported schemes a) Legal framework governing publicly supported export credit agencies (ECAs) o Are publicly supported ECAs subject to the same regulation (e.g. regarding capital requirements, taxation, bankruptcy) as private insurers/credit providers? o If not, please explain any differences and their potential impact on the market and competition thereon. b) Operation of publicly supported export credit agencies (ECAs) Please provide factual information on any differences there might be between the activities of the public ECAs (in short, medium and long term, domestic and export segments) and the corresponding activities of potentially competing private insurers/credit providers, in particular: o Differences in pricing levels; o Differences in type of cover; o Difference regarding other conditions (minimum required / average retention level, prudence of risk assessment, service provided e.g. in respect of the length of the application and claim processing etc.) Please explain how these differences may in your view affect the market and competition thereon, if appropriate by distinguishing between short and medium to long term as well as domestic and export segments. ECAs are expected to never operate in competition with the private market. However, unlike the private insurers ECAs enjoy an implicit or explicit government guarantee. ECAs are exempt from charging IPT (which can be up to 19%). It cannot be verified by the private market if an adequate loading is applied to ECA premium rates when insuring marketable risks.
A. 3. Market developments o Please provide factual information about the latest market trends both as regards the shortand medium to long term segments, and covering different forms of financing (insurance, guarantee, direct financing etc.). o What was the impact of the global economic crisis as regards the availability of private trade financing and credit insurance? Has the need and/or form of State intervention changed? Has the crisis affected on a lasting basis the scope of risks taken on by the market (i.e. the risks considered 'marketable')? o What are the forecasts for the years to come? Do these trends affect all types of trade financing and credit insurance equally? Do they affect all sectors equally? Please explain any differences. o Are there any specificities as regards domestic trade financing and credit insurance (covering transactions within one Member State), both in terms of latest market trends, the impact of the crisis and the forecasts for the years to come? The most relevant period is probably Q1 2009, when around 300,000 credit limits (est.) were lowered or withdrawn in a short period of time. Affected credit limits represented less than 5% of all active credit limits. The exposure involved was approx. EUR 75 bio (assuming affected credit limits were all fully used). The reduction in cover was in line with the drop in GDP in percentages in main European markets over the same period. The private market s willingness to remain on cover is clear from the high amount of claims that was paid over 2008 and 2009 (> EUR 9 billion). Current market trends 75% of EU ICISA members consider the market as being soft. 25% regard the market as hard. All EU members confirm a downward pressure on premium rates. Main reasons for this downward trend: - Increased competition (75%) - Threat of no-insurance or self-insurance (36%) - Improved loss ratios (27%) Other reasons given include demand for increased exposure, increased reinsurance appetite, relaxation of underwriting discipline and improved risk perception by the policyholder. A. 4. Rationale of public intervention o Under which circumstances would you consider there would be a potential need for public intervention in the area of short-term and/or medium to long-term trade financing and credit insurance? In other words, are there specific situations (e.g. type of instrument, duration, sector etc.) where the market is not able to provide trade financing or export insurance? Please explain what these situations would be. o In your view, in terms of need for public intervention, are there any fundamental differences to be considered between short and medium to long term and between export and domestic trade financing and credit insurance? Please explain.
ECAs that offered additional reinsurance cover (top-up or stop loss) during the crisis, in particular those that did so in co-operation with the private market, were generally more effective. What is seen as less effective are schemes that offer export credit support (premium subsidies, direct cover), in particular if this is done without consultation or involvement of the private market. In general support schemes ignore the core of the problem, which is often the lack of adequate bank lending to the insured buyer. The assumption that private credit insurers were, in all cases, unwilling to underwrite insurable risks, is incorrect. An effective support scheme should take the following elements into account: a. additional state reinsurance capacity, accessible by private underwriters as well as private reinsurers (risk syndication) b. access reinsurance layer via traditional ways (quota share, XL) c. all underwriting decisions by the private underwriter, including additional top-up layers or similar reinsurance lines (avoid different underwriters on the same risk) d. all pricing by the private underwriter e. reinsurance-schemes available to all national and international credit insurers f. distribution: scheme made available via traditional sales points for credit insurance under the condition that all decisions lie with the underwriter. (Avoid situations such as e.g. in Singapore, where a broker is the sole access point of a scheme.) SECTION B B.2. 'Marketable' and 'non-marketable' risks The current Communication is built on the distinction between 'marketable' and 'nonmarketable' risks. 'Marketable risks' are risks associated with short term export credit buyers in the EU and certain OECD countries. In these cases, Member States shall in principle not intervene. All other countries are considered to be non-marketable and state intervention to provide insurance cover for risks related to them does not require notification to and approval by the Commission. o Do you consider the definition of the marketable countries/risks appropriate? Please explain why/why not. o Does the scope of marketable risks differ for different types of instruments or policy holders (in particular in terms of duration, countries, sectors, type of companies)? o Please explain what, in your view, are the decisive elements to qualify a risk as marketable or non-marketable. ICISA members consider the definition of marketable risks appropriate under the assumption that this applies as intended. However, since its introduction the definition was applicable for only a brief period (introduction of a simplified procedure in 2004 followed by an escape clause). As end-dates to these exceptions continue to be moved, there is some concern about the effects of a long-term involvement of Member States in short-term trade credit insurance as well as the effect this may have eventually on the short-term credit insurance landscape. Rather than changing the intention of the definition, the private market should be consulted on risks involved. Co-operation between the State and the private market is expected to diminish the potential risk of market distortion and of (unintended) competition.
B.3 The escape clause Under the Communication, an escape clause allows under certain conditions State intervention where the 'marketable' risks become 'temporarily non-marketable' owing to the unavailability of private insurance or reinsurance capacity (point 4.4). The Temporary Framework introduced a temporary procedural simplification regarding the demonstration of the unavailability of cover for short-term export-credit. o Do you consider that the condition for demonstrating the unavailability of cover under point 4.4 of the Communication (evidence from two large, wellknown international private export credit insurers as well as a national credit insurer) is appropriate? Please explain why/why not. o Do you consider that the procedural simplification of the Temporary Framework for demonstrating the unavailability of cover may also be justified after the crisis period for which the Temporary Framework was adopted? Please explain why/why not. o Please also explain what would in your view be the most appropriate evidence to demonstrate that a risk is temporarily non-marketable (please explain both in relation to the source of the evidence and in terms of type of information, e.g. statistical data, market report, letters, etc). Unavailability of cover is either the result of lack of capacity or that a risk is too high and therefor uninsurable. Any evidence should be able to distinguish between the two and be clear on why cover cannot be obtained. In case of lack of capacity, additional capacity could be offered by the State and made available through the private market. In case of an uninsurable risk, the State will benefit from knowing that the level of risk remains the same, whether the underwriter is private or public. In all instances a dialogue on the risk between the State and the private insurers is essential. This avoids competition and assures that the State has access to similar risk information available to the private insurer. Different underwriters on the same risk (State and private) should be avoided. To avoid competition, (additional) State backed cover should be accessible through the private insurer only. o Do you consider that the condition for using the escape clause under point 4.4 of the Communication regarding the alignment of premium rates with the rates charged elsewhere by private export credit insurers for the type of risk in question, is appropriate in order to allow State interventions that correct market failures while at the same time minimising distortions of competition? Which other conditions might be appropriate? Please substantiate your view. o Do you consider that the intervention of the State under the escape clause leads to distortions of competition at the level of the companies obtaining insurance? Please explain why and how any such distortion could be minimised. ECAs are exempt from charging IPT (which can be up to 19%). It cannot be verified by the private market if an adequate loading is applied to ECA premium rates to avoid competition. o Point 2.5 of the Communication provides a specific escape clause for SME with limited export turnover (i.e. annual turnover not exceeding EUR 2 million). Do you consider that specific
conditions for demonstrating the unavailability of cover for risks incurred by SMEs, with or without a limit on export turnover, are needed? Please explain why/why not. Underwritten risks concern buyers. Whether a risk can be insured is determined by the ability of the buyer to pay on due date. EU ICISA members representing 90% of market share offer dedicated SME policies. Minimum premium per policy ranges from EUR 1,200 to EUR 5,000 p.a., depending on the insurer. Over 90% do not require a minimum insurable turnover. SECTION C Do you have any other comments on the application of the Communication or proposals for its modification on issues other than the ones covered in the previous questions? 8 o Based on your replies above, do you consider that the Communication should (a) be maintained, (b) modified or (c) allowed to expire in December 2012? Please substantiate your answer. The Communication should expire in December 2012. There is some concern about the effects of a long-term involvement of Member States in short-term trade credit insurance as well as the effect this may have eventually on the short-term credit insurance landscape. o Please provide copies of any documents or studies which may be relevant for this review. Please indicate whether the Commission services may contact you for further details on the information submitted, if required. Yes, please contact rob.nijhout@icisa.org or edward.verhey@icisa.org.