Trade credit insurance in the current market

August 2013 | 10QUESTIONS | RISK MANAGEMENT

financierworldwide.com

FW speaks with Vladimir Lapshin, chief commercial officer at Aon Rus insurance brokers, about trade credit insurance.

FW: Could you provide a brief overview of the current market for trade credit insurance? What trends have you seen over the last 12 months or so?

Lapshin: The trade credit (TC) insurance market is expanding rapidly. The main market players are the large international companies opening subsidiaries in Russia, such as Euler Hermes, ONDD, Coface and Atradius. They are bringing Western trade credit insurance and sales technology to the domestic Russian market. There is no official market size data but we estimate it to be $80-100m per annum in terms of GPW. The highest penetration of trade credit insurance is in consumer electronics and the pharmaceutical industry where over 90 percent of the sales are covered. Trade credit is also gaining popularity in the other industry sectors like finishing materials, food and beverages, detergents, and tyres. Russian companies usually prefer to sell on pre-payment terms or rely on well established relationships with their clients rather than on TC insurance.

FW: How did the 2007-08 financial crisis affect the reputation of the trade credit insurance market? Is the market now recovering?

Lapshin: We have not recognised a significant downturn on the trade credit insurance market reputation resulting from the 2007-2008 financial crisis. Even though many limits were cancelled rapidly, a substantial amount of losses was reimbursed. The TC insurers were hard hit in 2008, and this forced them to be more aggressive in sales, simultaneously improving control over the buyers’ financial performance and credit limits granted so far. The market is now fully recovered and pricing levels are about the same as in 2007 or slightly softer – the average deductible level is 10 percent each and every loss now compared to 15 percent in 2007.

FW: What recent regulatory and legislative developments have shaped trade credit insurance?

Lapshin: There have been no serious developments in Russian insurance legislation in the past four to five years. Tax issues are the most serious concern for TC insurance buyers as TC premiums are not tax-deductible under the current tax laws of Russia. Important decisions in respect of claims practice have been taken recently by the Supreme Arbitration Court which ruled that any unintentional error or omission or act of the insured shall not relieve the insurer from liability.

FW: In what ways has the relationship between insurers and customers evolved since the financial crisis? To what extent do trade credit insurers now demand more transparency and disclosure?

Lapshin: Insurers became more flexible in terms of policy wording but are strict in terms of deposit premium charge and terms of premium payment. More information and transparency is required concerning relationships with debtors, debtors’ group structures and ownership. Insurers want to know any information that directly or indirectly influences the evaluation of the risk. Government-related debtors are still out of coverage and are not welcomed unless they are a small part of a big credit portfolio. Insurers have started to provide new products for the Russian market – for example, top-ups or discretionary limits. Sometimes insurers can provide a 10-day grace period before the credit limit cancellation date. Also, insurance companies are gaining an appetite for new industries that were regarded as uninsurable a couple years ago, such as tyres or construction machinery.

FW: To what extent has the trade credit insurance market provided added comfort to companies operating in, or dealing with, emerging markets?

Lapshin: Being a powerful tool of sales, TC insurance certainly provides more comfort and security to the sellers. Taking into account that Western insurers are outnumbered on the Russian trade credit insurance market, one would suggest that multinational companies feel better with a TC policy in place, particularly in cases where the coverage is provided by one global insurer both in Russia and abroad.

FW: What products and structures are available to businesses contemplating trade credit insurance? Can policies be ‘tailor-made’?

Lapshin: The availability of TC products strongly depends on the industry sector and credit sales volume. Insurers prefer to deal with traditional FMCG and sectors where TC insurance penetration is traditionally high. The minimum annual sales volume threshold is $5m. Pre-shipment risks and single long-standing projects are out of scope unless in exceptional cases. Each insurer has its own policy wording, but it can be individually tailored in favour of the client. Experienced brokers can improve the policy wording in all cases.

FW: What are the most difficult types of trade credit risks to insure at present? What new credit risks do you see emerging on the horizon?

Lapshin: It is very hard to estimate the creditworthiness of sole proprietorships and some LLCs, especially in industries such as agriculture or light industry – for instance, clothing. Sometimes there are serious problems with providing credit limits, especially in cases where debtors refuse to provide financial statements or any additional information.

FW: Could you provide an insight into some of the general policy triggers, exclusions and warranties that would usually form part of a trade credit insurance policy?

Lapshin: Normally, TC policies have roughly the same wording as in Europe but insurers claims management has a much more formalistic approach. Any insured should clearly understand which actions should be taken when the loss occurs. Also, the insured or the broker must check all the aspects of trade credit policy wording and attachments –premium payment clauses, loss notification terms, currency exchange clause, subrogation requirements, and so on. Even if the policy wording has a lot of exclusions, the majority of them can be in contradiction with legislative provisions of the Civil Code of Russia and revoked by arbitration.

FW: What particular legal issues should a business consider before signing a trade credit insurance contract? Do you believe companies adequately contemplate the terms and conditions of trade credit insurance policies?

Lapshin: There are a lot of grey areas in TC insurance from a legal standpoint. As for the tax issues, the insured should understand first that the TC insurance premium is paid from net income. The insured’s broker should advise how each insurer works with the particular sector, and the insured’s legal counsel should carefully read through the wording of policies and consult with the broker.

FW: Looking ahead, what developments do you expect to see in the trade credit insurance market over the next 12 months and beyond?

Lapshin: I predict growth in the TC insurance market, and growth in the number of companies working through insurance brokers. Insurance premium rates will be flat, long term contracts will be available and portfolio solutions will be possible for major world brand names. Brokers will provide complex solutions for debts’ management.

Vladimir Lapshin, is the chief commercial officer at Aon Rus insurance brokers. His areas of specialty include large corporate Russian clients, marine hull and liability, and cargo and trade credit insurance. Mr Lapshin has 18 years experience in insurance. In 1993 he started his insurance career with Ingosstrakh Insurance Company in Moscow as Marine liability underwriter, continued as head of Marine department of various Russian insurance companies. He joined Aon in 2005. Mr Lapshin holds an MSc degree from Moscow Engineering Physics Institute (State University). He can be contacted on +7 495 660 8687 or by email: vladimir.lapshin@aonrus.ru.

THE RESPONDENT

Vladimir Lapshin

Aon Rus