Q: To what extent do you see an erosion in the boundaries between (a) PRI and Trade Credit Insurance and (b) PRI and financial guaranties. In each case, what are the implications of this erosion?

A: It seems to me that the whole market for PRI, Trade Credit Insurance and Investment Insurance/PRI is in a state of change and flux. In an important sense, this is nothing new. However, some of the changes are so fundamental as to call into serious question the way this sector of the insurance market operates. There is an increasing overlap between what used to be called Investment Insurance but which is increasingly swept up into the category of PRI and export credit insurance, especially medium and long term facilities (MLT). In the past, investment insurance related only to equity investments but all that changed when it began to be applied on any scale to loans and especially to “free standing” project loans not associated with equity investments—a category of business which now dwarfs equity insurance facilities. The growth of project financings where the insured risks relate not to the strength of the buyer/borrower/guarantor but to the viability of the project itself made things more complicated, especially where project viability and important parts of the security package depend on undertakings etc. from host governments to do certain things and not to do other things. Any traditional boundaries of any significance were further eroded when Export Credit Agencies (ECA’s) and others became willing to issue “Political Risk Only” export credit cover for project loans.

Another traditional market distinction or boundary has been between political risks and commercial risks. But here again, there is now overlap and an increasingly grey area between the two. I wonder how valuable this traditional distinction and categorization now is. For example, it is not clear where or how risks should be categorized in the increasingly important area of exchange rate movements. Are the risks political or commercial? Or does this really matter for so long as it is clear whether they are covered or not? And what about the risks of a failure of a government or quasi-government entity to fulfill its contractual responsibilities or to meet its undertakings or default by a sub-sovereign or quasi-government buyer?

Arguably, Trade Credit Insurance will most commonly apply to credits of less than two years. This is a fairly clear area where most of the business is now done by short term (ST) credit insurers, very often by one of the “Big Three” of Atradius, Euler Hermes or Coface.

In the MLT area, especially where project financings are involved, the position is more complicated and there are a variety of insurers, both private and public. But, against the background I have mentioned earlier, I am not at all clear that any traditional boundary between PRI and other facilities is of much value to anyone. The key is surely in this area, as in so many others, a clear definition of what risks are being covered and not how they are categorized.

Q: Would more precise policy language be a benefit? If so, to whom?

A: The answer to this must be “Yes.” Clearer wordings would help everyone. Whatever the conventional wisdom, my clear view is that it helps no one for there to be fudging or uncertainty or lack of clarity, deliberate or otherwise. Both insurers and insureds need to know before the issue of a facility whether a risk or situation is covered or not. The worst time to find this out or to uncover a difference of view is at the claims stage. What happened in Argentina and Indonesia is a good example of these points. I know that some insurers—including some long standing and large ones—feel that fuzzy wording preserves their flexibility and freedom of action and some brokers also favor some degree of uncertainty to prove the value of their involvement. But I think they are wrong. Even in crude marketing terms, it is very desirable for insureds to know what they are buying—“It will—probably—be all right on the night” does not seem to me to be a very good product from anyone’s point of view!

A linked area is, I think, the desirability of much clearer wordings in the traditional exclusion, especially in reinsurance arrangements for credit insurance, of financial guarantees. I should like to see this exclusion much more clearly explained with examples, so that all parties know where they stand without leaving things to be sorted out by the courts or arbitrators after rejection of a claim.

Q: Can (and should) product improvements restore demand for CI and CEN products? What Improvements do you think are needed?

A: I would personally favor a rather wider or more radical approach. I should begin from the position of trying to establish in as much detail as possible what investors or lenders or exporters really want and need. Brokers could play a useful role here in teasing out and articulating this in terms of perceived risks, etc. But it could also be a very useful part of what I see as the essential dialogue between insurers (especially underwriters) and insureds. I do not believe that any refusal of underwriters to meet or talk direct to insureds is helpful to either party, whatever the traditional position may be. Such a direct dialogue—or willingness to have such a dialogue—is surely crucial to the establishment and development of mutual understanding and mutual trust.

This market research and dialogue should help to establish what insureds see as the main risks they want to be covered. Insurers can then better consider whether they are willing to provide such insurance.

Such a process would seem to me to be much more likely to lead to relevant new products and clarity of wordings than simply tinkering with traditional products, however popular this may have been in the past. At the risk of caricaturing the position, I sometimes see the painful step by painful step approach of “widening” the creeping expropriation area of an example of what not to do.

Q: What is the future market for conventional PRI, especially since CI and CEN seem to have diminished?

A: Insurance is a cyclical business and so is demand for some insurance products. As I have said earlier, the whole area of inconvertibility and exchange rate movements has caused problems and disillusion amongst insureds. This will continue until wordings are clarified and insurers decide in more detail what risks they are and are not prepared to underwrite in this complex area. In my view, insurers would do well to steer well clear of underwriting future exchange rate movements per se. Better leave this to the banks and their forward exchange products. Similarly I would avoid trying to compete with the more esoteric options products.

As for CEN, I agree that most investors seem to have decided that they are not concerned about confiscation or nationalization risks. Personally, I think they are wrong. And I thought this long before Yukos.

Q: What future role do you see for public sector political risk insurers?

A: This is fascinating, especially for me. As I have said earlier, fashions and the market change and insurance is a cyclical business. And this is an area where myth abounds. For example the whole raft of assertions that “Only public or government insurers will do…” This is, for example, very often said of facilities for small exporters.

Usually these assertions are half-truths or just plain untrue. And you do not need to be a total cynic to sense that some public insurers are looking for a “new” role or seeking to prove that in some areas they have or need to have a monopoly, given the significant growth of private sector activities and capacity.

Public insurers continue to face serious problems, especially when—in theory at least—they are precluded from competing with private insurers. And as their financial objectives are tightened, their accounting arrangements made more open and transparent and as they are told to be “more commercial,” so they face what I have long seen as the sheer impossibility of achieving both of the twin objectives of breaking even/not making losses and accumulating reserves/provisions whilst not competing with private insurers. The key here is whether or not in the real world there is a sufficient volume of “non-loss making” business which the private sector is unable/unwilling to do so as to provide the public insurers with sufficient premium income not only to the meet claims and losses but also to pay their overheads and administration costs.

In my view, in the ST trade finance area, sooner or later the only role for the public sector will be to provide contingent reinsurance against the possible severe contraction of the private reinsurance market. Apart from all else, very few public insurers now have the IT power or buyer status records or economies of scale or the credit limit expertise to produce or operate world class and internationally competitive ST facilities, including for small exporters.

The MLT area is more complex, difficult and sensitive. Cases often have a very high value and very long horizons of risk. However, for insurers to be able to offer an efficient and valuable service to exporters and lenders, they would need to be handling cases on a day to day basis. Only then will staff have the necessary up to date market knowledge and relevant current technical expertise. This is not a theoretical area. You need to be in the market or out of it. Insurers can’t be mothballed and brought back into fully operative and efficient life by the kiss of some prince!

For the future, I confess to increasingly holding the view that for MLT business, the medium and long term role of the public sector may best be to leave the fronting and processing of business to private insurers and for the public contribution to be as providers of capacity or reinsurers. MIGA, as a multilateral IFI, may be the exception for various reasons.

I appreciate of course that this view may not be universally welcomed but it is surely better than death by a thousand cuts or “reviews.” Many of my former colleagues may strongly disagree with me, but I cannot escape the feeling that a reinsurance/capacity provider role begins to have a certain inevitability about it. ■


Malcolm Stephens, CB, is well known in trade credit and political risk insurance circles, having served as Chief Executive of the UK export credit agency ECGD, as Secretary General of the International Union of Export Credit and Investment Insurers, and in senior government and banking positions. He has also assisted in the establishment and development of ECAs in Eastern and Central Europe. Mr. Stephens is a prolific writer and speaker as well as a consultant on export and trade, project finance and export credit and investment insurance. He is Group Chairman of International Financial Consulting Ltd.