Insurers play key role in export credit market

Authored by AXA XL Lead Underwriter PRCB Heiko Schlick

Credit insurers are working alongside banks and export credit agencies as they play a vital role supporting international trade and infrastructure investment.

Trade finance is the lifeblood of international trade in goods and services. It facilitates economic development, creates jobs, and enables European corporates to enter new markets. It also supports billions of dollars of investment in vital infrastructure projects, that provide power, sanitation, healthcare and transport to millions of people around the world.

One of the cornerstones of trade finance is credit insurance, which helps give lenders the confidence to finance high value projects in foreign markets. Around 90% of all global trade relies on some form of credit, insurance or guarantee, according to the Berne Union, which represents the international credit insurance market. Berne Union members alone provide payment risk capital worth around USD 2.5 trillion each year, insuring some 13% of the value of total global cross-border trade.

Providing vital support

The specialist credit insurance market – both private insurance companies and national export credit agencies (ECA) - provide vital support to international trade and investment by protecting banks and exporters against non-payment, which can arise from commercial risks, such as insolvency, or political risk, such as the revoking of an export licence.

Insurers and ECAs can provide coverage for high value projects and long tenors, in some cases as long as 20 years. While specialist credit insurers like AXA XL are able to underwrite such projects, they often do so alongside state-backed ECAs, which offer export credit cover in the form of insurance, guarantees, loans, or interest-rate support. Today there are 116 known ECAs worldwide, including the US, EU, China and in many emerging in markets.

By working together, credit insurers and ECAs are able to support projects that the private sector alone cannot, namely high-value projects that span long periods. Without the support of ECAs and private insurers like AXA XL, many vital infrastructure projects might otherwise struggle to attract investment.

Stability in times of volatility

Private credit insurers and ECAs help to provide stability and maintain trade during times of market volatility and change. During the 2008 global financial crisis, ECAs provided a reliable source of long-term financing, insurance and guarantees, and are set to play a key role in post-Covid economic recovery, as well as wider moves towards decarbonisation and digitalisation.

Looking ahead, ECAs and private market insurers are also expected to play an important part in promoting sustainable finance. As governments around the world look to tackle climate change and support the transition to a low carbon economy, they will increasingly be used to support the delivery of sustainable development goals in areas like clean energy, water and sanitation and agriculture.

Public private partnership

Many of the world’s largest ECAs, including those in the EU, US and UK, operate according to an international agreement facilitated by the OECD. The Arrangement on Officially Supported Export Credits [the Arrangement] fosters a level playing field for member ECAs and sets out the most generous financial terms and conditions that signatories may offer when providing officially supported export credits.

The Arrangement, which applies to transactions with repayment terms of more than two years, limits the maximum support an ECA can provide to a project’s total export contract value – the limit is set at 85% (during the pandemic this requirement was temporarily raised to 95%, although this relaxation is due to expire by the end of 2022). As a result, exporters and banks must finance the 15% down payment, which can often be insured in the private insurance market.

Complimenting the support provided by ECAs, highly rated credit insurers like AXA XL are able to underwrite the 15% down payment, reducing banks’ exposure and providing a degree of capital relief. We also collaborate with ECAs in the field of facultative reinsurance, reinsuring certain ECA transactions. Without the participation of private credit insurers and reinsurers, many projects would struggle to attract funding, and some would not go ahead.

ECA involvement and full disclosure by the bank is supplemented by AXA XL’s independent underwriting process, which includes a comprehensive risk assessment. Insurers use their own credit risk analysis, pricing models and information sources to ensure that underwriting is informed and that the risks of the transactions are acceptable.

Local expertise, backed by global capability

A recognised global provider of political risk and credit insurance, AXA XL continues to invest in local capabilities in Continental Europe. Last year we added an underwriting presence in Germany, the third largest exporter and importer in the world, to our existing political risk and credit insurance teams in France and Spain. Being closer to our clients means we can better understand the challenges they face and design solutions that precisely match their needs.

Our political risk and credit insurance underwriters in Continental Europe combine transactional experience with local language and market knowledge. Working closely with our global teams, they are able to draw on the expertise and knowledge of AXA XL’s credit insurance underwriters and analysts in London, North America and Asia Pacific.

Cautious optimism

The long-term outlook for the export credit market is positive, although in the short term clouded by current economic and political uncertainty.

Demand for project financing and export credit is likely to remain robust, supported by population growth and urbanisation in emerging markets and major infrastructure investment in mature markets. Meeting the Paris Agreement emissions cutting target, alone, will require massive investment - to reach net zero emissions by 2050, annual clean energy investment worldwide will need to more than triple by 2030 to around $4 trillion, according to the IEA.

Many of these projects involve billions of dollars of investment over decades, yet recent events are a reminder of the potential risks, from a major conflict, pandemic or financial market crisis. Private market insurers like AXA XL, working alongside banks and credit insurers, provide an important source of support and stability in an increasingly uncertain world.