The importance and challenges of insurance for the world trade

Silja Calac-Schneider discusses the new developments at the ITFA on Insurance

With growing trade volumes and increased pressure from regulators on capital requirements, banks are no longer in a position to provide for all the needs of world trade finance on their own. Insurance has become a key element to mitigate risks in trade finance.

As the Basel III regulations are being integrated in local legal systems, the impact on a bank’s capacity to finance trade increases. As banks seek ways to optimize the use of their ever scarcer capital resources, insurance becomes the perfect partner for those active in trade finance. This is because:

1.      Insurance companies are not competing entities. They will not enter into the funding and clearing business of transaction banks.

2.      Large parts of the trade asset class can't be accessed by insurers directly as they are not in a position to negotiate documents under LCs or to finance a supply chain directly.

3.      There is still large capacity available in the insurance market. As statistics from the FCI show, world exports have grown by nearly 15% over the last 5 years and cross-border factoring has achieved a growth of nearly 25% but credit insurance has grown by less than 10%.

To meet with the rising demand from the world of banking, insurance companies offer now an ever-growing range of insurance solutions to help mitigate risk-weighted assets:

Certainly political risk insurance and credit insurance, which banks often obtain via specialized insurance brokers, are the best known and established methods among those in the Trade Finance business. More recently, some insurance companies have also developed ways to cooperate with banks in the surety business offering risk cover for the issuance of performance guarantees, bid bonds, import LCs or even entire aval facilities for corporate customers. Some credit insurers cooperate with banks actively in supply chain finance to cover whole portfolios of small-to-medium sized corporate risks. And insurance companies have even entered the trade finance secondary market as investors on the assets side– i.e. with funding.

But there are still a few challenges to this partnership. Restrictive regulations put stringent requirements on the wording of a policy so that banks can use them as RWA reducing securities. Further, regulators also push the market towards standardisation. The European implementation of Basel III, CRD IV offers tight definitions based on which securities provide for regulatory capital relief. It also imposes on the way security wording has to be monitored. A legal opinion from a neutral party is required for each security document to confirm enforceability and legal effectiveness on a regular basis. Having to monitor policies with different wording usages might be costly for the Trade Finance business.

Also, IRBA requirements on rating of insurance companies might lead to insufficient reduction of risk weightings. Insurance companies might seriously consider cooperating with banks on this issue and increase their lobbying efforts with regulators in order to make sure that their products are properly taken into account. The Insurance Committee of ITFA will support its bank and insurance members to meet these new challenges and to reunite forces. For any questions, suggestions or initiatives please contact Silja Calac-Schneider at silja.calac-schneider@itfa.org

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Best Wishes and Great Times, Per!

We send Mr Per Fischer, Head of Financial Institutions covering CE, CIS, Russia, Turkey, Baltics and Mongolia every good wish on his retirement from Commerzbank after 28 years of service and wish him continued personal and professional success and happiness in his next phase and adventure in life.