Aon UK Limited is authorised and regulated by the Financial Conduct Authority Postmodernism in Trade Credit Insurance The beginning of the end or the end of the beginning? ICTF – October 2013 Stephen Taylor, Executive Client Director Aon Trade Credit t: +44 (0) 207 086 1631 | m: +44 (0) 773 0193356 e: [email protected]| thehub.aon.co.uk
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Aon UK Limited is authorised and regulated by the Financial Conduct Authority Postmodernism in Trade Credit Insurance The beginning of the end or the end.
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Aon UK Limited is authorised and regulated by the Financial Conduct Authority
Postmodernism in Trade Credit Insurance
The beginning of the end or the end of the beginning?
A quick recap – What is credit insurance?– Benefits– Why credit insurance matters?
Beginning of the end?– UK perspective– Impact of credit crisis– How the credit insurance industry has adapted?
End of the beginning?– Global perspective– Practical credit management solutions– Future predictions
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
A quick recap.....what is traditional credit insurance?
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Seller Buyer
Credit insurer
Insure credit risk
Payment for goods / services
Goods / services on credit terms
Pre
miu
m
Insu
ran
ce
Bank
Advance payment
Be
ne
ficia
ry
Protects the “debtor” asset Insures against non-payment (credit &
political risks) by the debtor i.e. bad debts Relates to B2B transactions Trade related (not a financial guarantee) Covers domestic sales & exports Purchased by SMEs, corporates,
multinationals Discretionary purchase Different policy structures, .e.g. ground up,
top account, catastrophe Purchasing drivers vary for each business
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
Bank involvement where financing
A quick recap.....the benefits
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Protects from bad debt
Risk prevention
- Identifies and avoids expected losses- Greater insight into customer’s likelihood
- Enables companies to extend credit terms- Reinforces credit management- Access to credit risk expertise and
analysis
Helps grow your business
- Supports mergers and acquisitions- Promotes sales growth whilst maintaining
credit management controls- Directs and supports sales to higher
margin markets
Risk transfer
- Transfers credit risk to insurer’s balance sheet
- Reduces bad debt provision
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
Global market share – why credit insurance matters!
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Source: ICISA
34%
24%
21%
3%2%
16%
Euler Hermes Coface Atradius/CyC AIG QBE Other
Globally trade credit insurance covers nearly €2tn of commercial exposures
Equivalent to 15% of global business receivables on credit terms
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
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Current dynamics – impact on credit insurance? Economic & Political
– US debt ceiling – sorted for now!
– Japan – stimulus package
– Government debt levels – how long can these keep increasing?
– Low interest rate environment
– Political Risks, e.g. Egypt
Financial Institutions
– Impact of Basel III
– Increase in demand for less conditional credit insurance products
Solvency II
– How will this impact insurers – capital allocation and pricing?
Social Media
– How to manage the information flow?
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
Aon UK Limited is authorised and regulated by the Financial Conduct Authority
The beginning of the end?
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A question of perspective – UK statistics
Year Number of policies Average premium rate Insured turnover (£M)
2002 12,355 0.16% 203,239
2003 10,413 0.16% 192,204
2004 9,811 0.16% 198,939
2005 11,202 0.14% 222,250
2006 12,504 0.13% 258,076
2007 13,708 0.12% 281,986
2008 14,086 0.11% 302,511
2009 11,430 0.13% 269,969
2010 10,177 0.14% 240,072
2011 10,202 0.10% 312,737
2012 10,550 0.11% 300,655
(Source ABI)
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
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Observations – UK market
2002 to 2012:– Policies purchased down 15%– Average premium rates down 30%– Business insured increased by 48%– Total premium relatively flat over period
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
– Self underwritten programme - full autonomy in the Insured’s credit management
– XoL structure -100% cover sitting in excess of bad debt provision/captive
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
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Single risk & syndication
The Problem: Insured only worried about concentration risk in portfolio
– Global company
– Client worried about impact of bad debt on share price
– £100million exposure on single automotive risk
The Solution:
– Syndicated Single Risk
– 5 insurers
– Claims co-operation agreement
– Non-payment Cover - 90% Indemnity
– Cost of insurance transferred to the Obligor via a finance charge
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
Top Account
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Covers key exposures, to which real catastrophe risk attaches.
It is ideal for companies that have no requirement to insure its entire ledger, yet wish to cover its largest strategic buyers.
Covered top accounts must be named buyers and a valid credit limit must be in place. A claim can be payable for the whole loss amount – above the first loss level.If it is a top-trader, limits must be applied for on all exposures above a pre-agreed level
Individual losses over policy period
Uncovered account Covered “top” account
First loss level
Series1
0
20000
40000
60000
80000
100000
120000
140000
160000
Top account levelAon Risk Solutions | Global & Specialty Clients | Trade Credit
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Risk Intelligence
The problem: insured wants to include Insurer risk information within credit management model– Global company - telecoms– Investment in credit management model– Wanted to benefit from ‘live’ risk intelligence– Did not want to purchase insurance
The Solution:– A few potential solutions:
1. Insurer risk information only
2. Independent credit management software company
3. Aon Trade Manager– Helps with debtor analysis, portfolio management and data transparency– Helps reduce DSO– Risk concentration more accurately identified
• Insurance purchased selectively
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
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Supply Bond: helping the buyer increase sales!
The problem: opportunity to increase sales with the buyer, but the buyer doesn’t want to increase collateral.
– Retail sector. £10million current exposure secured by Letter of Credit
– Opportunity to increase to £30million
– Buyer did not want to provide an increased Letter of Credit, due to impact on its financing facilities
The solution:
– Surety markets used to issue a supply bond
– On demand bond
– Buyer’s finance facilities improved
– Increased Sales
– Niche solution
Could also use credit insurance, if conditional wording accepted
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
Trade Finance
33Aon Risk Solutions | Global and Specialty Clients | Trade Credit
Buyers
Seller
Credit Insurance(90% to 100%)
Collection account
Bank
Payments
SalesReceivablesInvoicing
Bank purchases AR from seller for up to 100% of face value
Seller pays interest monthlyin arrears based on daily LIBOR
Join
t ins
ured
Join
t ins
ured
Invoice discounting process
Insured wants to improve financing:
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Financial Institutions: use of product
Credit Insurance is used to support a number of areas:
– Supply Chain Finance
– Trade Finance
– Export Finance
– Revolving Credit Facilities
– Acquisition Finance
– Bonds
How can non-payment insurance be used to help your company’s financing?
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
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Future Predictions
Aon Risk Solutions | Global & Specialty Clients | Trade Credit
– Improved Insurer model to weather the next economic downturn
– Globally multi-debtor and XoL markets will grow
– Geographical hot spots
– Single Risk & Syndication will become more important
– Financial Institutions use of product will increase
– Use of risk intelligence products will increase
– Broker expertise, innovation and approach important