SPECIAL FEATURE –
TRADE CREDIT INSURANCE
Facilitating trade with the MENA region
There is a strong increase in demand for trade credit insurance in the MENA region as a
result of increased trade flows and higher risk awareness among traders, says Mr Robert
Nijhout of the International Credit Insurance & Surety Association (ICISA).
T
rade credit insurance offers protection from financial
loss when receivables remain unpaid. It is an insurance
product, but also much more than that. It is a key
financial instrument for exporters and sellers to manage credit
risk, helping to prevent the risk of systemic claims.
Banks lend more capital against insured receivables;
credit insurance contributes to increased sales; it saves on
expenses such as credit information, analysis, collection
expenses, reducing provisions for bad debt and most
importantly, protects exporters’ and sellers’ balance sheets
against the negative impact of credit losses. It helps improve
the policyholder’s credit standing by improving the credit
quality of its receivables.
Trade credit insurance policies are generally one-year
policies, and are tailor made to the individual client’s needs,
the type of company, the nature of its business and the
countries to which it exports.
A trade credit insurance policy either insures all receivables
(so-called whole turnover policies) or a selection of these,
for example, the top 10 buyers, or risks exceeding an agreed
amount (XoL). Insured buyers can be based abroad or in the
same country as the seller. Cover includes payment risk as
well as political risk covering events outside the control of
the buyer or seller.
Risks are insured by means of a credit limit on each insured
buyer, ie, companies with whom the insured seller trades. A
credit limit is an objective opinion from the underwriter of
the financial condition of a company, not the reason for the
financial position of that company.
Credit insurers have sophisticated underwriting systems,
allowing for thousands of credit limit decisions on a daily
basis. Each credit limit is monitored and adjustments are
made when trade increases or if the financial situation of
the buyer justifies this.
Obtaining security
One of the most important aspects of having trade credit
insured is that traders can trade on open account. This saves
costs, and allows traders to focus on delivering their goods
or services rather than on obtaining financial security for
every transaction.
However, trade credit insurance is not the only payment
security that is available. Buyers of credit insurance can also
opt for alternatives, such as securing trade-related payment
through letters of credit (L/Cs).
However, L/Cs are costly and can be burdensome to the
exporter’s business. They freeze a portion of the buyer’s credit
and are specific to one transaction only. Trade credit insurance
offers a better alternative, because it is affordable assurance
without the administrative burden of an L/C. It allows for
safe open term credit terms worldwide, enables the exporter’s
bank to consider otherwise ineligible foreign receivables as
collateral, helps the policyholder to qualify for larger credit
lines against better terms, and allows traders to expand their
business into new markets in a safe and cost-effective manner.
Trade in the MENA region
Compared to other regions, trade forms a relatively
small portion of the MENA region GDP, according to
a 2010 IMF Working Paper. Exports and imports as a
percentage of GDP are relatively low and much lower
when oil exports are removed. The paper states that
“the region trades significantly less than expected
based on economic, cultural and geographical
characteristics”. Trade constraints include restrictive
trade policies, complicated customs and quality
control standards and infrastructural impediments.
However, this is not the case for the entire region,
as the Gulf States, for example, now have low tariff
rates, superior infrastructure and low barriers to
trade. The UAE and Qatar rank high with regard to
ease of doing business. Another positive development
is that strong intra-regional trade links are noted as
a result of economic synergies.
The top five export markets for the region are
Japan, India, South Korea, China and the EU. Goods
are imported largely from India, China, the EU, the
US and Japan. Telecommunications, retail, chemicals,
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April 2013
www.meinsurancereview.com
SPECIAL FEATURE –
TRADE CREDIT INSURANCE
pharmaceuticals and the automotive sector stand out as
well-performing sectors.
A higher disposable income, increased government
spending and a young and growing population leads to
growth in consumption and in trade. The non-oil industry
is demonstrating robust growth, in particular in the UAE.
As trade on open account increases, so does the
demand for trade credit insurance. The availability of
credit insurance cover in the region will benefit from
greater transparency in obtaining financial information,
reliable financials, recognition of retention of title and faster
bankruptcy procedures.
MENA market review
About The ICISA
T
he ICISA was founded in 1928 as the first credit
insurance association. Surety companies have been
joining since the 1950s, allowing the association to grow
into the leading international organisation in the field
of trade credit and surety bonds.
ICISA members account for over 95% of global
private trade credit insurance business, and form a
central role in facilitating trade, by insuring trade credit
risks or by providing security for the performance of
a contract. ICISA counts 49 members insuring risks
in practically every country in the world.
2012 was a relatively good year for trade credit insurers in
the MENA region, in particular with regard to the GCC.
Surety bonds are similar to bank guarantees, but
The trade credit insurance market in the region grew by
there are also differences: surety bonds are typically
approximately 15% in 2012. ICISA members Atradius, Coface
conditional, whereas bank guarantees are on demand.
and Euler Hermes accounted for most of the policies signed
Only the performance risk lies with the surety, where the
last year.
bank has the financial risk on the construction project.
Estimated premium for the region in 2012 was around
Accounting wise, surety is accounted for as a liability like
US$50 million. Atradius, Coface, Euler Hermes and the
other insurance products whereas credit risks in a bank by
Islamic Corporation for the Insurance of Investments
nature are accounted for on the asset side.
and Export Credit (ICIEC)
Although in many countries
jointly represent around 85%
originally bonds are issued by
of the MENA market share.
banks, the security provided
The Gulf region is one of the
The average loss ratio over
by an insurer has proven
2012 is expected to range
equally acceptable. This has
areas where notable growth in
between 20% and 25%, with
enabled many enterprises
demand for trade credit insurance
total exposure in a range of
to set up separate lines of
$35 billion to $40 billion.
credit and bonds with surety
of some 15% is expected for 2013.
I n 2 01 3, t r a d e c r e d it
or insurance companies. In
Some demand for non-traditional
insurance members see a
doing so, they protect their
mixed picture; some markets
lines of credit with banks,
cover, in addition to the locally
are expected to harden while
which might otherwise be
others will soften. Concern
dominant whole insurable
blocked at such time when
i s e x p r e s s e d a b o ut t he
this working capital was
turnover cover, is also seen.
political instability in parts
needed. Bank s usually
of the MENA region and the
prefer to issue so-called “onvolatility in Southern Europe.
demand” bonds and must
The economic slowdown
therefore treat them as unin Europe and the ongoing financing constraints of banks
presented letters of credit.
are other external factors negatively influencing the 2013
Unlike traditional insurance, sureties do not undertake
outlook for trade credit insurance. The Gulf region is one of
to spread risk, but rather to pre-qualify and rigorously
the areas where notable growth in demand for trade credit
select their principals.
insurance of some 15% is expected for 2013. Some demand for
To regulate the issuance of surety bonds, a supporting
non-traditional cover, in addition to the locally dominant
legislative framework is a requirement. Such legislation is
whole insurable turnover cover, is also seen, in particular
common in most OECD countries. To create a level playing
from banks, manufacturers and global trading houses.
field for providers of these types of guarantees, thus giving
clients a genuine choice, countries that have not done so
The surety bond alternative
yet are recommended to introduce surety legislation.
Construction projects often involve more complex risks.
The risk that payment is not received is just one of them.
Increasing importance
Contractors can fail, and there are many other elements
The MENA region is of increasing importance to the trade
that can jeopardise the successful ending of a project. Surety
credit insurance sector. A trade credit insurance policy
bonds are a useful tool in this context.
supports traders in transacting securely on open account
A surety bond is a means of providing security to protect
while financiers welcome the additional security that is
a beneficiary against the default or insolvency of a principal
offered. As trade continues to grow in the region, so will
up to the limit of the bond. An example is the failure of
the demand for trade credit insurance, facilitating trade,
a contractor to complete a contract in accordance with its
for the benefit of sellers, buyers and the wider economy.
terms and specifications or the failure of an enterprise to
Mr Robert Nijhout is Executive Director of the International Credit
pay taxes or customs duties to a government or department.
Insurance & Surety Association (ICISA).
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April 2013
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