17 minute read
Interview with Kay Scholz President of ICISA
Insurers will likely have focused predominantly on the Environmental element when considering ESG in their business. Perhaps this is also the most due to it being the most easily quantifiable within the ESG acronym. Recent developments in the regulatory agenda have driven this focus, but this has also coincided with more obvious and personal experiences of the effects of climate change, such as record temperatures all around the world, more widespread wildfires on multiple continents, more frequent and severe weather events and many more beyond these. These matters together make this topic unavoidable. Insurers have also recognized for a long time that such events were becoming more frequent and having direct and indirect impacts on a wide range of risks. That insurers will have to face increased claims stemming from such events and the impact on their bottom line has also been a jolt to act.
Advertisement
Insurers then have a clear role to play in the transition to a low carbon economy. This will play out on both sides of the balance sheet with changes in underwriting practices on the one side, and greater emphasis on green assets on the other. As with everything in the battle against climate change, the transition to greener ways of working and operating must occur faster and more efficiently. Assessment of climate risk in underwriting
There is for sure a challenge in insurance about how the climate risks are assessed, priced and modelled. Looking at the insurance sector more widely, there has been a growing movement to exclude from their underwriting certain types of business that harm the environment. In an analysis within ICISA, members were asked earlier this year if there are any particular risks excluded from their underwriting and about 90% of respondents said that they currently or will in the future exclude certain risks related to coal-fired energy production.
Examples of best practice across the sector are also emerging. For example, Euler Hermes has put in place a pioneering initiative to include environmental sustainability within their risks assessments of different countries. Within the indicators utilized, those aimed at assessing environmental sustainability include: energy use per GDP, renewable electricity output, water stress, recycling rate and climate change vulnerability. In the case of Munich Re an Environmental Risk Department has been set up to look at all the projects that might affect the environment. Similar initiatives are seen across reinsurers, but primary insurers too are taking note of such efforts. Higher investments for sustainable projects
If we take a look at the asset side, the proportion of insurers’ investments that are green continues to grow. According to Insurance Europe, about EUR150 billion was allocated by European insurers to green investments in 2020. Insurers are learning that as institutional investors, they can exert significant influence to demand greater transparency and sustainability from within their underlying assets. The governmental investment programs would open extra revenues for insurance companies. Programs like Green Deal in Europe and Green New Deal in US are increasing, providing new business opportunities to sureties and credit insurance companies to write new business.
As regulators and policymakers broaden the admissibility of greener assets within capital models, their uptake will continue to grow and the role of insurers in driving change will also grow. These efforts will also be important to ensure that “greenwashing” is not an issue for insurers. It is important that insurers don’t simply rely on their green assets to balance out their brown liabilities. For insurers to influence the debates around economic transition, as well as to help address growing climate-related risks, insurers, including credit insurers and sureties, will need to be more sustainable through both their underwriting and their investment practices.
Conclusion
There is definitely a sense of responsibility within financial sector towards ESG. Insurers are acknowledging that they can do something actively to respond to the threats ESG programmes seek to address. It is also important that such programmes are not simply “special projects” on the side that don’t quite fit into any one business unit, but rather that ESG is quickly integrated into every aspect of how insurers do business. In some quarters, there is doubt on the existence of man-made climate change and/or whether our industry can or should play a role in this field. Having said that, regulators and policymakers have recently weighed in on this topic, saying that sustainability is to become one of the criteria to base capitalization on. The recent speech of the new chairman of EIOPA serves as a striking example. During interviews conducted with ICISA members, I’ve noticed that our members would appreciate the support coming from associations like ourselves to open the dialog. We are proud to take on that role and to support our members in their efforts to make the world a better place. After all, insurance is about putting bad situations right. And there’s not time like now to do that.
Focusing on the future
Interview with Benoît des Cressonnières
During the last Annual General meeting of ICISA, the ICISA membership elected their new Vice-President of the association. Benoît des Cressonnières (Euler Hermes) was elected Vice-President of ICISA. In the upcoming months, he will work closely with the President on all ICISA activities. Benoît has served on ICISA’s management committee for the last decade and, as such, is intimately familiar with ICISA. We’ve asked Benoît about his plans and priorities for the next months. In the upcoming pages you can read his answers to these questions.
What was your reaction when nominated as VicePresident of ICISA and what made you want to accept this nomination?
I was very happy when I was appointed Vice-President of ICISA, to become a member of a “new” team together with Kay Scholz (President) and Richard Wulff, our new Executive Director. This team has a clear target to move ICISA forward in setting up a new guidance, transforming the Association to better serve its members, being at the heart of their concerns as well as a trustful partner to support and promote the Trade Credit Insurance and Surety to the benefit of all members worldwide. This will be a long and challenging journey especially in a permanently changing and volatile environment. But Trade Credit Insurance and Surety are extremely efficient tools to secure global trade and projects in the global world. I am passionate about these specialized insurance products and would like to contribute in bringing my almost 25 years’ prctical experience and helping ICISA to focus on the core topics of the industry.
Euler Hermes is one of the biggest members of ICISA. How do you think both Euler Hermes and ICISA will benefit from this?
Being the largest member does not give you any right to be arrogant but only the duty to bring added-value to the Association through your broad experience and footprint. Euler Hermes has to be a model for the industry, always acting fairly and with a lot of respect for all members. Fair competition is one of the basic rules to grow a business. And ICISA has a key role in promoting our specific insurance products, and to the best interests of its members lobbying the most relevant stakeholders for our industry that are the Regulators, rating agencies, Finance and Trade Ministries and, more specifically in Europe, the European Commission as well as EIOPA whenever needed. As a member of the Allianz Group, Euler Hermes has developed a tremendous network across the Globe which could benefit ICISA to get relevant introductions when required.
The competitive landscape has changed drastically in the last decades. What do you see as ICISA’s role in this landscape?
It is true that the competitive landscape has changed and moved from local to global players. However, there are still a lot of specialized and valuable local players which also deserve the attention and support from ICISA. The Association should become an incubator of ideas, a platform where experts can meet, find relevant information to develop the business fitting the customers’ needs. In a world where data became the key resource, ICISA needs to be a reliable data collector and provider as well as a “door opener” when it comes to more specific queries from members.
What should be, in your opinion, ICISA’s priorities?
There are 2 sets of priorities, one focused on the transformation of ICISA itself, its processes, its staff to become a “State of the Art”, modern Association of experts able to deliver the services the members need, a real value for the fees they spend. The other area to focus on is the contents and services ICISA has to develop to support the members more efficiently. As already highlighted, data is today a key resource, a raw material, and, let’s be honest, today ICISA is not able to deliver comprehensive, useful and reliable data to its members and more generally to the industry. An Association could only be credible and trustful when it brings real, tangible added-value. Therefore the team should first meet each member to define which are the expectations and accordingly build up a roadmap and action plan to transform and modernize the Association in a reasonable timeframe using the resources in the optimal way.
What is your favorite memory when it comes to ICISA?
The first one coming to my mind is the “LGD” study. We started to discuss this project at the beginning of the 2000s as we considered it critical to give evidence to the regulators, rating agencies and business partners demonstrating how efficient risk underwriting is in Trade Credit Insurance, its ability to manage the risk and the recoveries, which is unique in the insurance landscape. We were only very few and needed to externalize the data collection and statistical computation to make the study relevant, useful and ensure the anonymity of the data provided. The study started with the university of Zurich (ETH) and ICISA quickly stepped in to coordinate the work and convince its members Trade Credit Insurance members to participate and send their own data to grow the database and increase the study’s relevance and reliability. It was a long journey and there are still improvements needed in the process but globally the project is an useful achievement for the industry.
Euler Hermes, a part of Allianz, has become one of the insurance industry’s champions of sustainability. In your opinion, what role should ICISA play in this topic?
One of the stated goals of ICISA is to promote best practice in the industry. As how important do you see this goal when it comes to young people in our industry?
One of the targets of ICISA is, indeed, to set-up Technical Committees on core topics, organize meetings and build up a platform where members have the ability to exchange best practices applied in the market. If you remember one of the most visible outcome of these “best practices” is the ICISA’s definition of a “Financial Guarantee” still used as a reference in our industry.
During the meetings of the various Technical Committees held within ICISA, experiences on market trends and developments, changing legal environments are shared and debated in order to understand and see how these will affect our business. Accordingly, the industry will propose adequate answers, products’ evolutions and ICISA prepare efficient strategies to educate countries regulators, rating agencies and other stakeholders of our ecosystem. It is highly appreciated to see younger people or new “joiners” of the members attending these meetings where they can learn a lot about the industry and its best practices. They are the future leaders of the member companies and through the Association they have the opportunity to enlarge their network but also to bring new ideas thinking out of the box and help to make our industry stronger, efficient, resilient to continue being a key support to the on-going development of the Worldwide Trade. And alongside STECIS, ICISA promotes academic trainings where young people have the opportunity to develop their skills in Trade Credit Insurance and Surety.
It is time for the Financial services industry to drive the concept of ESG (Environmental Social & Governance) to respond to unexpected challenges effectively and place the economy at the service of our planet. The ESG should be integrated in the DNA of all the companies which need to facilitate the transition to a low carbon economy and develop the next generation of companies and business environment. ICISA as an Association has a role to play in encouraging all its members to join for this challenging but fascinating and urgent journey. ICISA as a business partner has its own responsibility to play an active role in meeting stakeholders’ sustainable expectations. And it goes beyond in encouraging, communicating and lobbying about best practices in equality and diversity, environmental protection as well as development of sustainable Green Insurance products.
The sharpest tool in the box? – Examining state support in the pandemic and preparing for the future
By Daniel de Búrca, ICISA
The pandemic has demonstrated that a wide toolkit of measures is available to governments in the midst of a crisis. Given the nature of the pandemic and the early uncertainty about how it would affect the real economy, it is understandable that a broad approach was required. Businesses were able to access a range of direct grants and loans, as well as furlough schemes, tax deferrals, and in some instances, deferrals of insolvency itself.
Of course, this sort of belts and braces approach was not seen everywhere around the world with many countries struggling to respond quickly to Covid-19. However, there are indications that the weight of government interventions overall had some positive effects in other economies too. By putting money directly into the hands of businesses in one country, demand was maintained to some extent, including in cross-border trade. This may have resulted in somewhat of a dampening effect in other countries too, or at least provided an important source of income when local markets were struggling. Recovery will be difficult for many countries, with related effects on supply chains and possible volatility in commodity markets an emerging risk.
From a credit insurance perspective, specific measures were put in place early in the pandemic in several markets, including Germany, France and Spain within the EU, and Canada and the UK outside. These state-backed reinsurance arrangements sought to absorb the risk of increasing credit insurance claims as liquidity and non-payment risk in different sectors were expected to deteriorate. This was done in return for a portion of premium from private insurers, as well as their commitment to avoid cutting limits as a means of reducing exposure. In this sense, the credit insurance schemes provided a short-term psychological boost to the sector.
At ICISA, we recently took a look at what would have happened without these schemes. In a comparison between markets where schemes existed and those where they did not, it is clear that wider support measures had similar
effects in each. Reductions in insolvencies and lower claims volumes were common across many markets as a result. Elsewhere, it is also clear that some businesses took the opportunity to wind-down in an orderly fashion during the pandemic, without impairment to debtors. So, even thought the psychological benefit of credit insurance schemes was valued, the stability brought to the economy through wider state support likely had a greater effect over time, including in credit insurance markets.
The overall picture in many advanced credit insurance markets is one where insolvencies and resulting claims arising from defaults have remained low throughout the pandemic as a result of state intervention. But the same trend in insolvencies is seen in markets with credit insurance schemes as in those without. Indications from market participants during 2020 and early 2021 show that insurers’ appetite and capacity for providing cover recovered throughout the year and was at or near pre-pandemic levels by the end of the year.
When we looked at conditions in different markets during 2020 and beyond, we can see that while cuts to limits were sharper in markets without credit insurance schemes, this was likely softened by protections given to the real economy. For example, while 2020 was the worst year for insolvencies in the US since 2010, insolvency rates declined monthby-month from July to the end of the year, and overall, insolvencies were down by an estimated 5% on 2019 levels, according to research by Atradius.
Of course, there are different dynamics in each market and a crisis such as Covid-19 will impact each economy differently. Those with a heavy focus on tourism and hospitality will have suffered worse than others due to lockdowns and travel restrictions. From a credit insurance perspective too, how mature and competitive a market is, whether limits are cancellable or not, and other factors will also be influential in what actions credit insurers would have taken with our without state reinsurance arrangements. However, the overall trend of capacity and appetite returning in either scenario suggests that wider state support measures would have given insurers sufficient comfort for reductions in cover to have been less sharp than in other crises.
Within the EU, government interventions were delivered under a temporary framework introduced to allow for greater flexibility in state aid rules. Credit insurance schemes formed part of this framework. Most of these closed at the end of June 2021 without further renewal as markets were capable of returning to a more normal footing. Indeed, a proposal for a new scheme at that time in a market that had not brought one in earlier was ultimately rejected as unnecessary on the basis of the readiness of the local industry there.
In a related move, the EU’s competition arm, DG COMP, also introduced a temporary decision on removing all countries from the list of “marketable risk” countries. This decision was taken on the assumption that there was no private market available for short term cover for certain export-credit risks and therefore open to public bodies to provide cover. The decision was initially time-limited until 31 December 2020, but was subsequently extended until mid-2021 and later to the end of 2021. It seems unlikely that there was no private market available in “marketable risk” countries to warrant continued extensions of this decision, particularly as greater stability came to markets through the effects of wider state support. DG COMP is at the time of writing considering whether to extend this decision further. ICISA has pointed out that the ending of credit insurance schemes at the end of June 2021 and feedback from our members on market conditions, suggest allowing markets to return to a normal footing would be far more beneficial at this time.
The experience of these different measures – both those directly related to credit insurance and those focused on supporting the real economy – shows that governments have a range of tools available to them in a crisis. However, this experience has also shown us that there are limitations and drawbacks to their use. The blanket approach adopted by many governments clearly kept businesses afloat at a time of great uncertainty, but the extent to which it preserved “zombie businesses” remains unclear. Similarly, looking at the ESRB’s estimates of what portion of EU state support has ultimately been utilised, it seems likely that a more targeted approach could have the same effect on limiting negative effects in the real economy.
We also saw that credit insurance schemes can have a significant positive effect early on by allowing insurers to maintain their positions. However, their interaction with wider state support measures aimed at limiting insolvencies means they can lose their benefit over time. Similarly, continued extension of time-limited measures (such as the decision on marketable risks) can lead to unnecessary distortions in private/public competition, or in other ways prevent markets from resuming normal functioning as quickly as possible.
What steps governments take next will be crucial for how the recovery looks. As state support to the real economy ends, we may see an uptick in insolvencies as a result. However, while economies need to resume normal functioning to fully recover, “soft-landings” may be beneficial in some areas and a cautious and coordinated approach will be needed. Looking to future crises, we have learned that government interventions can keep many businesses viable during an extended crisis. However, we have also learned that targeted approaches could have the same effect as broader blanket approaches. Which approach is best will depend on the quality of information available to governments. Similarly, reinforcing the use of time-limits on different measures may provide greater clarity to those involved or benefiting from them. A cautious bias towards ending such measures on the specified date unless circumstances dictate otherwise may be preferable to continuous extensions. This is particularly true where market conditions indicate a return to normality is both beneficial and warranted.
