breaking down borders – trade credit insurance · 2019-02-28 · 2 how does it work? protection...
TRANSCRIPT
Prepared by Aon Benfield Presentation to Singapore Actuarial Society 7th General Insurance Conference
Breaking Down Borders – Trade Credit Insurance Bernice Zhang Ooi Choong Hern 28 May 2015
Aon Benfield Proprietary & Confidential | 28 May 2015 2
How does it work?
Protection against the risk of non-payment by the buyer due to commercial (buyer insolvency and extended late payment) and political risks
Manufacturer/Seller Retailer/Buyer
Credit Insurer
Goods/services
Subrogation Insurance premiums
Insurance claims
Credit Reinsurer
Aon Benfield Proprietary & Confidential | 28 May 2015 3
Trade credit insurance as a risk and financing tool
Risk protection & business continuity
Financing the cash cycle &
loan financing
Support growth
Increased competition
Regional uncertainty
Increasing interconnection
of global economy
Credit management
and information
Increasing risk management
maturity
Corporate governance
Uses of trade credit insurance Driving forces for trade credit insurance purchase
Aon Benfield Proprietary & Confidential | 28 May 2015 4
Features of the policy
Contract types
• Whole turnover policies
• Named-buyer policies
• Single-buyer policies
• Excess of loss policies
Contract covers
• Short term tenor of 60-180 days
• Available for both domestic and export trade
Underwriting
• Generally insures a portfolio of transactions at a certain limit
• Premium subjected to the quality of buyers, sales, loss history
• Insurer needs the ability to asses individual buyer and country risks
• Dynamic limit management
Aon Benfield Proprietary & Confidential | 28 May 2015 5
Global economies ranked by GDP in 2003
Global GDP USD 38.6trn
APAC%: 26.3%
Top 5 6th – 10th 11th – 30th > 30th
Economies ranked by GDP
Source: Figures from International Monetary Fund database
Aon Benfield Proprietary & Confidential | 28 May 2015 6
Focus has shifted to APAC in 2013
Global GDP USD 75.5trn
APAC%: 34.5%
Top 5 6th – 10th 11th – 30th > 30th
Economies ranked by GDP
Source: Figures from International Monetary Fund database
Aon Benfield Proprietary & Confidential | 28 May 2015 7
APAC continues to be a driving force; 38.8% global share expected in 2020
Global GDP USD 97.3trn
APAC%: 38.8%
Top 5 6th – 10th 11th – 30th > 30th
Economies ranked by GDP
Source: Figures from International Monetary Fund database
Aon Benfield Proprietary & Confidential | 28 May 2015 8
Total trade volume (USD bn)
Contribution of world trade (%)
2003 2013 2003 2013
World 15,076 36,710
North America 2,887 5,614 19% 15%
South & Central America 418 1,509 3% 4%
Europe 6,848 13,244 45% 36%
APAC 3,734 11,633 25% 32%
Rest of World 1,189 4,709 8% 13%
APAC has increasing dominance in import and export trade volume
APAC share of global GDP
expected to rise to 40% in 2025
Rapid growth in Asia, potentially fuelled by AEC
Globalisation
Growing maturity of
economy and risk awareness
Production transfers from China to other
developing Asian markets
Source: World Trade Organisation
Aon Benfield Proprietary & Confidential | 28 May 2015 9
Asian trade credit markets are slowly opening up to private insurers
South Korea: Export credit insurance opened up to non-life insurers
China: Export credit insurance market opened up Traditionally
government supported
New market entrants –
insurers and reinsurers
ASEAN Economic
Community
Change from secured terms
to open account
Singapore Govt scheme TCIS renewed till 2018
Japan: Relatively small credit insurance market relative to the size of its economy
Approx USD 3bn of trade credit
premiums
Aon Benfield Proprietary & Confidential | 28 May 2015 10
On average, Asian companies are taking longer to settle payments
India 2012 2014
41 65
Average Days Sales Outstanding (DSO) recorded
Singapore 2012 2014
47 47 Indonesia
2012 2014 49 100
Hong Kong 2012 2014
33 37
Taiwan 2012 2014
49 49
China 2012 2014
48 52
Japan 2012 2014
48 43
Source: Atradius Payment Practices Barometer 2012 & 2014
Global Comparison
2012 2014 2014 average
payment terms
APAC 44 54 34 North America 43 48 28
Europe 49 50 31
Aon Benfield Proprietary & Confidential | 28 May 2015 11
20m 0.1%
100m 0.1%
Modelling a single debtor
Default
No Default
5%
20%
100%
5m 1.8%
0m 98.0%
Loss Probability Loss Given Default
Aon Benfield Proprietary & Confidential | 28 May 2015 12
Other considerations when modelling a portfolio
0%
10%
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60%
70%
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1
• Trade credit insurance losses are correlated with the state of economy
• Economic variables may be used to test for correlation for the gross losses over time eg
• Real GDP growth
• Consumer and Business Confidence levels
• Credit spreads
• Bloomberg’s Index of US Financial Market Conditions (“BBFCI”)
• Varies over time and are highly specific to companies, sectors and countries
• Most PD scales are related to internally assessed ratings
• Larger companies will have their own studies to understand LGD reaching different thresholds
• ETH studies have industry-wide LGD based on data submitted from individual companies
Mean = 9.6%
Source: ETH
Histogram of the weighted LGD distribution
Black = Actual, Dotted = Fitted
State of Economy Default Probability & Loss Given Defaults
Aon Benfield Proprietary & Confidential | 28 May 2015 13
Is trade credit risk correlated with other classes of business?
5% 5%20%
43% 49%66% 69%
0%
25%
50%
75%
100%
125%
P MOT MOT A&H GL CRED PROP MAT
Syst
emic
Ris
k (C
V)
Source: Aon Benfield Insurance Risk Study, 2014
Systemic Risk
Loss Ratio Correlation Matrix
Aon Benfield Proprietary & Confidential | 28 May 2015 14
0
20
40
60
80
100
120
140
160
180
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013
Inde
x
Cla
ims
Rat
io
Claims Ratio Insured Credit Limits (Index) Implied* Premium Rate (Index)
Moving on: global credit market had a quick rebound to pre-crisis levels
Sources: International Credit Insurance & Surety Association, Swiss Re
Aon Benfield Proprietary & Confidential | 28 May 2015 15
Are there bright sparks in the Asian market?
Global (2013) USD 10.6bn
Asia 28%
China
Hong Kong
Indonesia
Malaysia
Philippines
Singapore South Korea
Taiwan
0.00%
0.02%
0.04%
0.06%
0.08%
0.10%
0% 10% 20% 30% 40% 50% 60% 70%
Cre
dit &
Sur
ety
Pene
trat
ion
Average 5-year Loss Ratios (2009 - 2013)
Sources: Axco, International Monetary Fund and publicly available insurance premiums data
Aon Benfield Proprietary & Confidential | 28 May 2015 16
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