The relationship between private and public insurers has been a sensitive and changing area for as long as I have been involved with political risk insurance (PRI) and trade credit insurance (TCI). My involvement goes back as far as 1965 when I joined the UK export credit agency (ECA). Since then, I have witnessed the progression of the relationship from most standpoints, as a public insurer, private insurer, banker/customer, broker, President, and later Secretary General of the International Union of Credit and Investment Insurers (Berne Union) and, in recent years, as a consultant to private, public, government and IFI/multilateral clients.
In writing this article, I am assuming—perhaps bravely—that the common aim of all parties should be to maximize the market capacity available and, more importantly, to try to get the best possible deal for the insured party; in other words, the insured party should be the most important entity involved. More difficult is the issue of whether or not competition is necessary for these aims to be achieved and whether the present situation is anything like the optimum one.
Competition with private insurers is and always has been a sensitive issue for almost all public insurers. EDC of Canada is one of the very few public insurers who openly and actively compete with private insurers. Some public insurers, like those in the USA and the EU, are subject to specific restrictions or prohibitions on competing. Most public insurers would probably go along some general (but, in practice, often pretty meaningless) objective of “cooperation” with private insurers.
This is, however, much more than a matter of semantics. One of the most important but frequently overlooked characteristics of both PRI and TCI is that they are insurance facilities and so insurers need both spread of risk and some stability and continuity of premium income. Reflecting this, it is very hard for any public insurer to operate on even a marginally profitable or even break-even basis if all it is allowed to do is to underwrite business that is not acceptable to any other insurer—in other words, to be quite literally an “insurer of last resort.”
Apart from all else, public insurers need to be in the market on a permanent and continuing basis in order to keep in place the infrastructure of skills, experience, and expertise essential to giving their customers acceptable service levels. Put more crudely, public insurers need to be either in or out of the market. They cannot veer from one to the other or suddenly spring back into fully effective life like some latter day Sleeping Beauty.
This whole area is one which abounds with myths.
- “It is only ‘bad’ risks for which there is a market capacity problem.” This is simply not true and, even for very good risks, there may be aggregation or concentration problems which can prevent insurers and even reinsurers from taking on very large cases or a number of such cases.
- “Only public insurers can provide the services and facilities that small companies need.” This is, at best, dubious especially in the area of TCI with its heavy reliance on huge quantities of status and other relevant information being manipulated by expensive IT systems. I would argue that, in many ways, only large private insurers can provide the minimum administration, maximum streamlining, quickest and clearest answer facilities that smaller companies need. It is, of course, true that only public insurers and their governments will knowingly provide below-cost facilities and subsidized premium rates, although who in anything other than the short run benefits from this is a good question.
- “Public insurers traditionally underwrite only political risks.” Most public insurers began life as short term (ST) TCI underwriters, moved into medium and long term (MLT) areas, and then project financings and PRI. And for many years very few private insurers have offered commercial risk only products and facilities. Few people would now accept the view that private insurers are unwilling/unable to provide insurance on large or long term political risks on a stable and continuing basis or that public insurers’ premium rates are always higher (or lower for that matter) than those of private insurers. Both private and public insurers can now offer experience and expertise and broadly comparable wordings.
- “It is always preferable for the public insurer to be the lead insurer and for private insurers to ‘follow’ when both are involved in the same case.” In practice, this is best looked at case by case to reflect not only the relative exposures, but also the comparative experience and expertise. It has, in my view and experience, never been the case that all of the best and most relevant expertise, information, and experience reside in the public sector and the passage of time has enhanced this view. This area is, of course, complicated by the position of the Multilateral Investment Guarantee Agency (MIGA), which can provide access to the “IFI Umbrella” to private insurers who follow it on a case. Arguably, this is a factor which distorts competition not only between MIGA and private insurers but also between MIGA and public insurers who do not enjoy any kind of “preferred creditor” status.
It is, of course, very dangerous and misleading to try to generalize not only about public insurers, but also about classes or categories of insurance. Public insurers differ greatly between countries not only in the level and range of facilities they can offer, but also in terms of the requirements and restrictions placed on them by their governments and, in the case of EU member states, by the Commission on Member States. Public insurers also differ greatly in status. Some are government departments (e.g., the UK), some are government owned corporations or companies (e.g., Canada), whilst some are private companies who operate part of their activities on “Government Account” (e.g., Germany).
However, all public insurers, whatever their size or status, face the challenge of how best to work with private insurers in order to meet the legitimate needs and requirements of their customers. Of course, the objectives of public insurers are more complicated than simply reacting to customer needs and wishes. Emphasis also has to be given to financial results and the restrictions and requirements placed on them by their governments. As suggested earlier, some spread of risk and some minimum levels of premium income are vital if regular losses and deficits are to be avoided. So the (inevitable) efforts of public insurers to achieve some spread of risk and some certainty and continuity of premium income often hinge on public insurers looking at business that would probably be acceptable to some private insurers. Put another way, there will always be some areas of potential competition.
In the past, competition between private and public insurers was probably thought of as a phenomenon of ST TCI business. However, this was never really the case and is far from the case in today’s market where private insurers are increasingly able and willing to underwrite the full range of PRI risks and, importantly, are happy to take long maturity cases.
As noted earlier, it is misleading to treat public insurers as a homogenous group. In practice, they differ greatly not only in size and status but also in the range and nature of the facilities they offer. But it is equally misleading to treat private insurers as a group of broadly similar entities. They also differ greatly, ranging from huge, primarily ST TCI insurers (e.g., Atradius, Euler Hermes, and Coface, offering not only insurance facilities in a large and growing number of countries, but also a range of associated activities and products such as the provision of status information on buyers and debt collection) to relatively small scale underwriting of particular PRI risks by underwriters in Lloyds syndicates.
Until the 1990s, one difference between private and public insurers was in relation to reinsurance. Public insurers did not normally reinsure (at the end of the day, the risks were, in effect, taken by their governments) and some of the largest reinsurers were in any case unhappy with political risks. Today, many public insurers are interested in and involved with co-insurance and outward reinsurance, even as many governments look to reduce their involvement in TCI and PRI and their exposure to contingent risk.
All public insurers are subject to varying kinds of oversight from their governments. They are also subject to two main multilateral agreements. First, under the terms of the WTO, governments and their ECAs/public insurers are required at least to operate on a break-even basis over time and to avoid the provision of subsidies for premium rates, etc. In practice, this has never proved to be a particularly onerous requirement and few countries seem to wish to be the one to throw the first stone in terms of initiating action against another country for breach of this requirement. Second, there is an OECD agreement (the OECD Arrangement formerly known, colloquially, as the Gentleman’s Agreement) in relation to the terms which may be supported by public insurers/governments in respect of MLT business. This has become an increasingly wide-ranging and detailed agreement. Originally it applied only to length of credit and profile of repayments, quickly took in minimum interest rates, and now sets out minimum premium rates for both political and commercial risks. It also embraces project financings. This has been pretty effective not only in controlling and eliminating “competitive subsidies” on interest rates and trying to rationalize and standardize premium rates, but also in providing a forum for regular meetings between OECD governments and public insurers on technical matters relating to MLT business. Interestingly, the OECD Arrangement does not, in general terms, apply to PRI facilities issued by public insurers.
More controversial and wide ranging restrictions on public insurers—or, more precisely, on their governments—are applied by the EU Commission on Member States via the Provisions on Marketable and Non-Marketable Risks. Put simply, these restrictions relate essentially to ST business. The Commission (which arguably is not at its best when dealing with real life commercial matters) purports to divide risks/cases into two categories: first, marketable risks, supposedly representing risks that the private market is able and willing to insure with no significant gaps and, second, non-marketable risks, which private insurers/reinsurers are regarded as unable or unwilling to underwrite on any scale and so where market gaps exist. The categories are supposed to be kept under close review so as to take account of changes in the market. Public insurers are only able to operate in the second area (i.e., in the area of non-marketable risks). Thus EU public insurers are prohibited from underwriting marketable risks.
In the real world, the categories are artificial and usually bear little relationship to day-to-day private market activities. In practice, and for the reasons mentioned earlier in relation to spread of risk and minimum premium income, some governments/public insurers are not slow to press for categories of business to be categorized as “non-marketable.” The result is that EU public insurers regularly underwrite business that could be done by private insurers, so getting a wider spread of risk and higher premium income. It is very important to note that these restrictions and categories do not apply to public insurers outside the EU.
In general, the Commission looks to the OECD Arrangement to apply control on the MLT activities of public insurers in member states and, misleadingly, says in the preamble to the Communication that “MLT export credit business is largely non-marketable at the present time.” However, even though the marketable and non-marketable categories are EU concepts and apply only to ST business, they seem to have taken on a life of their own and conclusions seem to be drawn more widely in the market that, if a country is categorized as non-marketable for ST business, it must be the case that it is in the same category for all other business, especially MLT and even PRI business. Clearly this can have implications for public insurers and judgements on competition.
This last point is interesting in the sense that perhaps the leading specialist PRI broker told me that, in a very recent review of their substantial book, virtually the whole of the cases both by number and by value were in respect of business in countries categorized by the Commission as non-marketable. Interestingly, little or none of the business is written in conjunction with or under the umbrella of an ECA or MIGA. (One potentially fascinating consequence of the recent Brexit vote in the UK is that when the UK leaves the EU, the UK’s public insurer (UK Export Finance, formerly ECGD) will no longer be subject to any EU restrictions on marketable risks.)
More widely, public insurers might argue that they have to operate under constraints and influences that do not apply to private insurers. Some restrictions are international like the OECD Arrangement and, for EU member states, the Commission’s requirements on marketable risks. Some public insurers might say that they are “forced” by their governments to do business that does not conform with their normal underwriting standards but are still required to meet the cost of claims/losses. However, private insurers also operate under constraints, albeit different ones. As a general rule, public insurers are not subject to the (often onerous) rules and requirements that the insurance regulators or national supervisors in their countries apply to private insurers.
Looking to the future and trying to draw some conclusions from the foregoing, I cannot escape the view that some public insurers have never come to terms with the fact that they no longer have monopoly products and that, nowadays, their customers often have a real choice between buying insurance from a public or a private insurer. Put in starker terms, some public insurers have still to come to terms with the reality of competition. This must, and does, impact cooperation and collaboration between private and public insurers. One potentially important manifestation of this is the continuing and disappointing unwillingness of (some) public insurers to allow private insurers to join the important Medium and Long Term Committee of the Berne Union. This must surely have some adverse impact on full cooperation and does nothing to help increase the overall MLT capacity of the market.
All of this gives rise to the question of what would be the ideal or optimum kind of relationship between public and private insurers. To some extent, of course, the answer depends on the position of the person asking the question. Would, for example, both private and public insurers give more or less the same answer? Would public insurers really want to see a larger and more vibrant private sector with greater and greater capacity? Would private insurers really want to see public insurers retreat to a contingent or truly “insurer of last resort” status, operating only when there were clearly defined and established “market gaps,” i.e., public insurers would really only issue facilities when all other options had demonstrably failed?
Against this background, it is perhaps best to try to work from the standpoint of the insured party or buyer of insurance. In other words, what kind of relationship between private and public insurers would be best for their actual or potential customers?
I imagine that most customers would like to see the maximum market capacity and appetite for risk, including for more difficult and challenging cases and countries. They would also prefer low(er) premium rates, high(er) percentages of cover/indemnity, and few(er) exclusions. No doubt they would also like clearer, less ambiguous wordings. I think they would also like facilities that provide the easiest and least conditional access to finance at the cheapest rates/lowest costs. For banks looking to buy insurance, I assume they would like facilities that give them most in terms of meeting the requirements of Basel III (i.e., coming closest to being unconditional guarantees). No doubt the more experienced insureds would look for a sensitive and positive attitude towards potential loss, claims payments, and recoveries/loss minimization.
More difficult, perhaps, is to assess whether insureds are likely to achieve better results in all or most of these areas from competition between public and private insurers or whether, in anything but the short run, collaboration and cooperation between insurers will be likely to be more effective.
In a perfect world, I guess that insureds would like to begin in situations where insurers, private and public, were actively competing for the business but where, once the insured had made the choice of insurer, all insurers would work together with full collaboration and cooperation. But, in the real world, is this practical and achievable?
One trend that should, perhaps, be a cause for concern is where public insurers attempt to “corner the market,” seeking to obtain advance commitments from private insurers and reinsurers, so “soaking up” pretty much all available capacity in the market. This means that insureds and their brokers have, in effect, no choice of insurer and any potential competition has effectively been eliminated. To the extent that this has been happening, I think it is a very undesirable trend and is not in the interests of insureds or potential insureds. In effect, it is a suppression of competition and, however it is dressed up, it is not in any sense an optimum position. This would of course be true if it were to be private insurers taking the lead in cases.
Relations between private and public insurers may well not be a new topic. It is one which has a long and sometimes checkered history. But it remains an area of real practical importance and one that would benefit from greater and more open scrutiny.
It is not realistic and—other than in the very short run—in anyone’s interests to expect public insurers always to withdraw if a private insurer is willing to underwrite a case. Not least from a customer point of view, I believe some competition is desirable and competition would be reduced, probably significantly, if public insurers were to adhere strictly to an “insurer of last resort” role. It is still the case that the market needs the capacity that public insurers have and this is true across the whole risk spectrum and not just in the “bad risk” area.
This much is pretty common ground for all parties. Beyond this, I doubt there is much consensus. What, for example, do public insurers bring to the market apart from capacity? Should public insurers be, in effect, freed from restraints on competition with private insurers? Can there ever be fair competition between public and private insurers? Essentially, the question is, “What in current conditions is the best role for public insurers?”
Perhaps these questions are the subject of active discussion. If not, then they certainly should be.
Malcolm Stephens has a long and distinguished career in trade credit and political risk insurance. He is currently Group Chairman of International Financial Consulting.