Trade Credit Risk in
Turbulent Times
RIMS Annual Meeting
Boston, MA
April 28, 2010
Download at: www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5520  Cell: 917.453.1885  bobh@iii.org  www.iii.org
Economic Volatility
A Halting Global Recovery is
Underway; Volatility Remains
3
World Economic Outlook: 2010-2011P
IMF says growth in emerging and
developing economies will outpace
advanced ones in 2010/11.
8%
6%
6.3% 6.5%
4.2% 4.3%
4%
3.1% 2.6%
2.3% 2.4% 2.4%
1.0% 1.5%
2%
1.9% 2.0%
0%
-2%
-0.6%
-4%
-2.4%
-3.2%
-4.1%
-6%
-5.2%
World Output
Advanced
Economies
Emerging United States
Economies
2009
2010P
Euro Area
Japan
2011P
Outlook uncertain: The world economy is recovering from the global
crisis better than expected, but activity is reviving at different
speeds in different parts of the world, according to the IMF. This
means trade credit risk will vary regionally and by industry.
Sources: IMF, World Economic Outlook; Insurance Information Institute.
4
GDP Growth: Advanced & Emerging
Economies vs. World, 1970-2011F
Emerging economies
(led by China) are
expected to grow by
6.0% in 2010
GDP Growth (%)
10.0
World output is forecast to
grow by 3.9% in 2010,
following a -0.8% drop in 2009.
8.0
6.0
4.0
2.0
0.0
Advanced economies will
grow slowly in 2010,
dampening energy demand
(2.0)
Advanced economies
Emerging and developing economies
10
08
06
04
02
00
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
(4.0)
World
Source: International Monetary Fund, World Economic Outlook Update, Jan. 26, 2010; Ins. Info. Institute.
Global Industrial Production Rebounds
From a Tailspin; Global Trade Recovering
Annualized 3-Month Percent Change
20
15
10
5
0
-5
-10
-15
-20
-25
-30
Global industrial production was
down over 25% in early 2009, severelt
curtailing global trade, but growing at
a 9% clip in late 2009
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: International Monetary Fund, World Economic Outlook Update, Jan. 26, 2010; Ins. Info. Institute.
Merchandise Exports Are Growing
at Pre-Crisis Levels Again
Annualized % change of 3-month
moving average over previous 3month moving average
75%
Advanced economies
Emerging economies
50%
25%
0%
Note: data are through November 2009
Source: International Monetary Fund World Economic Outlook January 2010 update at
http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv
Jul 09
Jan 09
Jul 08
Jan 08
Jul 07
Jan 07
Jul 05
-75%
Jan 05
-50%
Jul 06
-25%
Jan 06
Global trade crashed during
the financial crisis. Seizure of
credit markets contributed
significantly to the crash.
7
Global Industrial Production and Exports:
2006 to 2011P
(Annual Percent Change of 3-Moving Average)
Source: International Monetary Fund, January 2010; Insurance Information Institute.
Global trade crashed during
the financial crisis. Seizure of
credit markets contributed
significantly to the crash.
8
Exchange Rates, Inflation
and Interest Rates
Pace of Recovery and Government
Monetary and Fiscal Policies
Influence Exchange and Inflation
Rates, Impacting Trade Credit Risk
and Cost
9
Trade Index Weighted US Dollar
Exchange Rate*
January 2000 through March 2010
Depreciation
of dollar after
Tech bubble
and post 9-11
115
110
Post-crisis
depreciation of dollar
105
Dollar appreciates as role
as global “reserve
currency” affirmed during
global financial crisis
100
95
90
85
80
75
70
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
The Global Financial Crisis Produced Significant Exchange Rate
Volatility in 2008 and 2009; Despite the Fact that the Crisis Originated
in the US, it Was Other Currencies That Weakened
*The broad index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading
partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares.
Source: US Federal Reserve, Board of Governors; Insurance Information Institute.
Inflation Rates for Largest European
Economies & Euro Area, 2008-2011F
1.1%
1.0%
1.4%
2.5%
0.1%
0.3%
0.5%
0.3%
1.0%
1.6%
1.6%
1.4%
1.5%
1.1%
1.3%
2.0%
1.6%
2.5%
1.8%
2.2%
2.6%
3.0%
2009
2010F
2.4%
3.3%
3.5%
2008
2010F
3.6%
4.0%
2.8%
Inflation is below 1.5% across
major European economies and
interest rates remain low as a
result, obscuring tight conditions
in trade credit markets
% Change from Prior Year
0.0%
Euro Area
Germany
Source: Blue Chip Economic Indicators, 3/10/10 edition.
UK
France
Netherlands
5.0%
4.5%
4.0%
4.0%
Interest rates remain generally low in
much of the world, depressing insurer
investment earnings. But rates are often
held low by government action and
lingering economic weakness, obscuring
tight conditions in trade credit markets
4.4%
3-Month Interest Rates for
Major Global Economies, 2008-2011F
2008
2009
2010F
2011F
1.7%
0.4%
0.2%
1.4%
1.3%
0.7%
0.5%
0.6%
0.4%
0.5%
0.3%
1.0%
0.7%
1.5%
1.2%
1.2%
2.0%
2.0%
1.8%
2.5%
2.1%
3.0%
2.5%
2.6%
3.5%
0.0%
Euro Area
Japan
Source: Blue Chip Economic Indicators, 3/10/10 edition.
UK
China
US
Internationally, Most Short-term
Interest Rates Are Still Quite Low
Central Bank
Current
Interest Rate
Last
Changed
Bank of Canada
Bank of England
Bank of Japan
0.25%
0.50%
0.10%
April 21, 2009
March 5, 2009
Dec 19, 2008
European Central Bank
1.00%
May 7, 2009
U.S. Federal Reserve
The Reserve Bank of Australia
China
Hong Kong SAR
0.25%
4.25%
5.31%
0.50%
Dec 16, 2008
April 6, 2010
Dec 22,2008
Dec 17, 2008
Korea, Republic of
2.00%
Feb 16, 2009
Hungary
5.50%*
Mar 29, 2010
*reduced from 5.75%
Source: http://www.fxstreet.com/fundamental/interest-rates-table/
Political Risk
Many Nations Suffer from Political
Instability, Fundamentally
Influencing Trade Credit Risk
14
Aon: 2010 Political Risk Map
Political and financial instability remain a feature of the business
landscape in 2010 due to the recession, according to Aon.
Source: Aon
15
Aon 2010 Political Risk Map: Findings
 Elevated Political Risk Levels to Continue in 2010
 Significant volume of credit and political risk claims in international insurance markets
have driven many of the 18 country downgrades in this year’s map.
 Aon believes 2010 will see elevated political risk levels continue before an overall
tendency for improving global business conditions becomes established. For many
companies and across different sectors, including credit and political risk insurance,
the business environment remains uncertain when trading with or investing in
politically or economically unstable countries.
 Movements on the 2010 Map
 A total of 18 countries have seen conditions worsen leading to a downgrade: Algeria,
Argentina, El Salvador, Equatorial Guinea, Ghana, Honduras, Kazakhstan, Latvia,
Madagascar, Mauritania, Philippines, Puerto Rico, Seychelles, Sudan, United Arab
Emirates, Ukraine, Venezuela and Yemen.
 Sudan, Venezuela and Yemen have been added to the Very High category, joining
Afghanistan, Congo DRC, Iran, Iraq, North Korea, Somalia and Zimbabwe.
 Eight countries/territories have been upgraded to a lower risk level - Albania,
Myanmar/Burma, Colombia, South Africa, Sri Lanka, East Timor, Vanuatu, Vietnam
and the Hong Kong Special Administrative Region of the People's Republic of China.
Bottom Line: Political and financial instability remain a feature of the
business landscape in 2010 as a result of the recession.
Source: Aon
16
A.M. Best: Country Risk Evaluation*
20
18
18
18
16
10 of the 76 countries evaluated by
A.M. Best are in the most at-risk
category. Country risk is factored
into all A.M. Best ratings.
16
14
14
12
10
10
8
6
4
2
Countries that pose the most risk and therefore greatest challenge to an
insurer’s financial stability, strength and performance (CRT-5) are: Belarus,
Bosnia and Herzegovina, Dominican Republic, Ghana, Jamaica, Kenya,
Lebanon, Nigeria, Ukraine and Vietnam, according to A.M. Best.
0
CRT-1
CRT-2
CRT-3
CRT-4
CRT-5
*A.M. Best defines country risk as the risk that country-specific factors could adversely affect an insurer’s ability to meet
its financial obligations. Countries are placed into one of five tiers, ranging from Country Risk Tier 1 (CRT-1) denoting a
stable environment with the least amount of risk, to Country Risk Tier 5 (CRT-5) for countries that pose the most risk and
greatest challenge to an insurer’s financial stability, strength and performance
Source: A.M. Best., AMB Country Risk Report, Sept. 2009.
Countries by Risk Tier Rating
CRT-1
Australia
Austria
Canada
Denmark
Finland
France
Germany
Gibraltar*
CRT-2
Barbados*
Netherlands
Singapore
Sweden
Switzerland
Malaysia
Malta
Ireland
Mexico
Netherlands Antilles*
Japan
Oman
Liechtenstein*
Poland
Macau
New Zealand
Slovenia
Qatar
Saudi Arabia
South Africa
South Korea
United Kingdom
United States
Spain
Taiwan
Belarus
Kuwait
Hong Kong
Norway
Antigua &
Barbuda*
Israel
Cayman
Islands*
Luxembourg
Bahamas*
Cyprus
British Virgin
Islands*
Isle of Man*
CRT-5
China
Bermuda
Italy
CRT-4
Bahrain
Belgium
Guernsey*
CRT-3
Brunei
Darussalam
Bosnia and
Herzegovina
Egypt
Dominican
Republic
India
Ghana
Indonesia
Jamaica
Jordan
Kenya
Kazakhstan
Lebanon
Mauritius
Nigeria
Morocco
Ukraine
Panama
Vietnam
Philippines
Russia
Tunisia
Turkey
Thailand
Trinidad and Tobago
United Arab Emirates
*Denotes countries to be considered “Special Cases” by A.M. Best
Source: A.M. Best., as of 4/13/10
18
Trade Credit Risk:
Summary & Outlook
Complex Array of Economic,
Financial and Political Factors Will
Buffet Trade Credit Markets for
Years to Come
19
Top 10 Risks & Reported Readiness and
Losses: Many Impact Trade Credit Risk*
Rank
Top 10 Risks – All
Industries
1
2
3
Economic slowdown
Regulatory/legislative
changes
Business interruption
4
Reported
Readiness – All
Industries
60%
65%
Loss of Income in Last
12 Months – All
Industries
57%
24%
79%
30%
Increasing competition
71%
39%
5
6
Commodity price risk
Damage to reputation
77%
58%
57%
9%
7
8
Cash flow/liquidity risk
Distribution or supply
chain failure
Third party liability
Failure to attract or retain
top talent
75%
70%
25%
20%
81%
68%
40%
16%
9
10
*Yellow shading denotes risks with greater impact to trade credit risk.
Source: Aon Analytics; Global Risk Management Survey; Insurance Information Institute commentary of trade credit risk.
Financial Crisis Increases Demand for Trade
Credit Insurance
 Financial crisis has led to significant increased demand for trade credit
insurance cover
 Banks and other trade financiers had to take measures during the crisis which
resulted in increased pressure on suppliers’ credit terms and high risk scenarios
 Trade credit insurers continued to support their customers during the crisis,
illustrated by: 20 million running credit limits; insured exposures at EUR 1.8 trillion;
claims ratio before costs of around 84 percent for 2009 (pre-crisis 40-60 percent)
 Available capacity not affected by the crisis, but pre-crisis terms no longer available
 Insurers increase information sharing and transparency
 High policy renewals of around 80-90 percent confirm customer satisfaction with
their insurance partners
 Increased information sharing and transparency will be provided to customers.
Emphasis on “added value” of insurers’ risk management role and higher
transparency re credit limit decisions
 Outlook
 Continued availability of trade credit insurance cover gives confidence and security
during fragile economic recovery
 Cost of capital and tightened risk environment continues to challenge industry,
leading to higher premium rates and stricter conditions
Bottom Line: Market now stable, but still challenging situation
Source: International Credit Insurance & Surety Association, April 2010
21
Trade Credit Insurance Marketplace
 Trade credit insurance market is concentrated in the hands of a few
 Total global annual premium income was over $8 billion in 2008
 Three major monoline credit insurers account for nearly 90 percent of market: Euler
Hermes (36%); Atradius (31%); Coface (20%). Backed by reinsurers
 Other companies involved include: Chartis, QBE, various Lloyd’s syndicates and
ACE, as well as govt-backed export credit agencies
 Exposures rise, but premium growth lags
 In past five years exposure levels of major credit insurers saw massive growth as
they competed for market share
 Premium income has not grown at same rate because of price competition and
increased writing of marginal risks by insurers
 Risk/reward imbalance
 Economic downturn takes its toll
 Persistent economic downturn with retrenchment of bank credit, drying up of letters
of credit results in significant rise in payment defaults and corporate failures
 These conditions have led to significant increase in claims and record high loss
ratios for major three insurers in 2009
 A capacity problem could follow in 2010 if reinsurance capacity shrinks or becomes
price prohibitive
Source: Marsh: Trade Credit Insurance and the Global Credit Crisis, 2009; Insurance Information Institute (I.I.I.)
22
Trade Credit Insurance Marketplace
 Insurers refocus on risk quality
 Credit insurers review and reduce exposures/limits on certain industry sectors and
countries of concern
 Industry sectors considered difficult by most credit insurers include: construction,
retail, commodities, electronic consumer goods, automobiles and transport
 Dramatic premium increases for loss-making policies. Some not renewed at any price.
 Insurers will not take on risk deemed to be volatile or unprofitable
 Alternatives for insurance buyers
 Top-up cover, other insurers, accounts receivable purchase agreements and govt
support some of the alternatives buyers are exploring
 Small market for top-up cover, but not in all regions
 Insureds with strong credit and ability to retain risk exploring increased use of captive
insurers
 Government-backed options offer limited support in some countries, but at a cost
Bottom Line: In 2010 challenging conditions remain, but receding
recession should improve loss situation for trade credit insurers
Source: Marsh: Trade Credit Insurance and the Global Credit Crisis, 2009; Insurance Information Institute (I.I.I.)
23
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