Tagged: Asia, Cargo, insurers, risk, specialist, trade, trade credit, underwriting

Originally published by Trade Finance Magazine, July/August 2006

The challenge for credit and political risk insurers is considering the numerous factors that affect the markets in which they operate. Global trends affect the demand for business and local issues determine how they structure cover for their clients. Oliver O’Connell looks at a snapshot of the Asian credit and political risk insurance market and the wider external factors and detailed internal issues that affect it.

“The first trend to take into account in the region is the increase in intra-Asian trade. This has been increasing over the last few years, and while business between Asia and Europe and North America has always been there, intra-Asia business is certainly a much greater percentage of the total than it was two or three years ago,” observes Jeremy Hampshire of Hong Kong-based Trade Line, the specialist trade credit and political risk insurance broker.

“The second trend, which follows on from that, which is obviously a global trend – is the movement from LC to open account. In Asia this has manifested itself as European and US buyers saying that this is the only way we are going to trade from now on. If you combine these two trends you end up with higher credit and political risk, especially credit, for companies within Asia, and their trading. It doesn’t matter where they’re trading, but this has led to an increased requirement for trade credit insurance,” he adds.

In terms of the most affected trade sectors, the trend began a few years ago with the transition to open account in the electronics industry. Following on from this was also a shift in the textiles industry amounting to approximately 65% of transactions by early 2005. Other trade sectors showing a similar trend include plastics, chemicals, steel, and some soft commodities.

This is also leading to a trend in which payment terms are being pushed out. Starting with a move extending payment terms from 15 days to 30, this has eventually been pushed as far as 60 days. These companies now have higher accounts receivables on their balance sheet for the same amount of business than they did one or two years ago. This means higher risk and supposedly more trade credit insurance opportunities.

In the last 18 months underwriters report to have seen a 25% increase in business, if not 30% in some areas, and in line with global trends, brokers have seen a 25-35% increase in enquiries over the same period.

Increased competition
Greater demand for insurance has seen an increase in interest in Asia from insurers, with a number of new office openings, cooperation agreements and new initiatives. Says Hampshire: “The main brokers have never made a big commitment to this class of insurance. They may have done so in Singapore for example, but they don’t have a significant presence. So things have been left largely to individual operators.”

In March, Trade Line entered into a strategic alliance with Cosmos Services Company giving the company access to a network of offices across Asia, as well as in London. For Cosmos, part of Japan’s Itochu Corporation, the aim of alliance is to expand its trade credit and political risk insurance field to better serve its client base. Trade Line still operates as a separate independent unit but now is a greater presence within the industry.

On the more specialist side of the industry, FP Marine Risks, the Hong Kong-headquartered specialist marine insurance broker, has launched a new trade finance initiative aimed at providing specifically designed marine insurance products for the industry.

Philip Bilney, executive director of FP Marine Risks, says: “There’s no doubt that in Hong Kong and Asia there is a growing need for trade financing banks to protect their marine exposures. By launching this initiative, we are leveraging our existing portfolio of specialist marine insurance services to address this need.”

Spearheading the new initiative is Audrey Poon, a broker with 16 years of experience in the insurance industry who joins FP Marine Risks as manager, trade finance. Having spent the past decade specialising in marine cargo insurance for trade financiers and international commodity traders in Singapore, Poon is aiming to help similar companies in Hong Kong minimize their risk in what FP Marine Risks see as an increasingly volatile market.

In the underwriting section of the insurance business, the major players are increasing their presence in the region. Atradius is establishing an office in Hong Kong at the moment and is investigating obtaining a license for China as well. Bermuda-based Exporters Insurance Company is establishing a representative office in Hong Kong in what is described as a prelude to the expansion of Exporters’ activities in the region through growing contact with local brokers. It is expected that Ace will also look to develop in Asia, perhaps using Japan as a platform for expansion into the rest of the region.

Hampshire adds: “A lot of the other majors are here already so perhaps some of the niche players will want to increase their presence here. We certainly get more visits of representatives from the majors coming through than three or four years ago. The general feeling is that there is more business going on in Asia and Latin America than elsewhere, and given the situation in Latin America at the moment, Asia seems preferable.”

In conjunction with this increased interest in the region is an increase in people moves within the industry. There is a level of opportunity, but with factors such as the cultural difference between Europe and Asia it is difficult for companies to simply parachute someone in and expect them to be able to create new business in a short time. Underwriters claim that with a lack of ‘home-grown’ specialist brokers, they have to spend more time on direct marketing and direct sales and cannot just rely on broker channels to drive business.

Active markets
In terms of the markets within the region that are driving business, China, unsurprisingly, leads the way in generating enquiries. Business coming from China is more for credit insurance rather than political, but most other active markets in the region are weighted more in the favour of requests for political risk coverage. For example, the Philippines, Indonesia and Vietnam all generate more political than credit insurance requests.

The challenge of low pricing that has featured across the world has been especially prominent in Asia with rates falling dramatically in most countries. Of the above mentioned countries, Indonesia and Vietnam have dropped quite significantly, though the Philippines and China have maintained similar pricing levels to the recent past.

Indonesia is of particular concern in that some brokers feel that margins have dropped to the extent that perhaps things have gone down by too much against the potential risk in the country. Mining has proved an especially strong sector for political risk insurance, Martin Phelan, head of political risk for the Pacific region at Marsh in Melbourne, comments: “We’ve done a number of transactions in lease and asset finance for mining equipment. For example in the coal sector in Kalimantan, Indonesia, where the client is supporting international contract mining companies by using asset finance as an alternate structure to pure project finance or traditional on balance sheet debt.”

In this instance the mining company required limited recourse project finance to develop $300 million copper-gold project on which it had completed a bankable feasibility study. The project is located in a sparsely populated country with limited infrastructure – physical, commercial and legal – very low income levels and virtually no history of foreign investment or financing other than that provided by development agencies. The mining laws and regulation that did exist was untested at the time.

Understandably the banks were concerned with the risks involved – the stability of key property rights including government commitment on issues such as royalties and the right to export minerals, the reliability and transparency of the legal system and the remoteness, and therefore possible vulnerability, of the project.

Marsh brought together a syndicate of political risk insurers to ensure that commercial lenders had the appropriate coverage against a range of actions and events that could affect the project.

High commodity prices across the globe over the last two to three years have been driven this mining and oil and gas boom causing a reasonably pronounced upturn in new projects and investment. This is channelling into copper, gold and other base metal mine development and the consolidation of project financing schemes in addition to new exploration and extraction of oil and gas deposits.

Phelan highlights the opportunities available for insurers: “A lot of the transactions we’ve been involved in are still creating further opportunities, medium to large project finance-based copper and gold projects, including in some new countries such as Laos. The commercial market facilitated the entry of foreign investment into the country over the last three years, and by the close of this year, total foreign investment over the last five years – largely from Australian companies in the mining sector – amounts to over $1 billion.”

As demonstrated by the Kalimantan mining project, it is localised issues, not global trends that determine the details of political risk coverage. The Philippines and Papua New Guinea tend to be both the hottest and most contentious markets for enquiries and are dominated by local risk factors.

On a national level the Philippines is a highly attractive country geologically for mine development, but is also a challenging country politically with a range of cultural-cum-political issues. The influence of the Catholic Church is just one of the political and cultural challenges faced by foreign investors in new mining projects, as it is a strong vocal force and strident agitator against new projects because of their environmental, social and cultural impacts.

Phelan comments: “At Marsh we get involved in very distinct regional, national, provincial and even local issues. Political risk is not just about sovereign government issues. For example Papua New Guinea has very high levels of tribal diversity especially in the southern highlands – nationally there are as many as 700 tribes and 700 different dialects. The devil is in the detail when providing cover to projects in regions such as this. It doesn’t necessarily stop deals getting done, but it can be highly intimidating as a challenge in the market. So you need to have the knowledge and ability to come to grips with what the issues are and how they can be managed.”

While it may be wider global factors that moderate the wider market trends and flows of business, it is the location-specific issues and the ability of both the underwriters and brokers to come to grips with them that determines success and failure in a regional market. There is no shortcut to developing workable market knowledge.

 Print This Post