The ‘risk revolution’

A new era in credit and political risk insurance is now being ushered in thanks to the ICIEC . MUSHTAK PARKER reports

One of the unintended benefits of the global financial crisis is the increasing awareness of risk and how to manage it in business, trade and investment. One risk management option is export credit and political risk insurance, and exporters, importers and the banks that finance them in the developing countries are now increasingly discovering these products.

The export credit and investment insurance culture in the 56-member countries of the Islamic Conference Organisation (OIC), however, has traditionally been at best under-developed although there are increasing signs that this has started to change especially in the post credit-crunch period.

While there are some 20 Export Credit Agencies (ECAs) in the OIC countries – which have recently launched their own professional body, the AMAN Union (the Union of Arab and Muslim ECAs) – the awareness and utilisation of credit and political risk insurance are still very low in IDB- member countries, according to Dr Abdel Rahman Taha, chief executive officer of the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), a member of the Jeddah-based Islamic Development Bank (IDB) Group.

To put this in perspective, in 2008 the 50 major ECAs of the world that are members of the Berne Union underwrote $1.3 trillion of export credit and political risk insurance. In contrast, in the OIC countries – ICIEC, the Turkish Eximbank, MECIB in Malaysia and the members of AMAN Union – only $14bn of export credit and political risk insurance was underwritten. .

ICIEC is the prime mover behind the credit and political risk insurance revolution in the Middle East and OIC countries led by Dr Taha, who has been at the helm of the organisation since its establishment 16 years ago. The corporation has 39 members with Albania the latest country to accede, making it the first European nation to join ICIEC. All the Arab countries except Iraq are members of ICIEC.

There is no doubt that the financial crisis badly affected the credit and political risk insurance sector in 2009. The major ECAs such as EuroHermes and Coface were particularly badly hit and sustained huge losses. The most widely affected were the OECD countries, including the US, Spain and the rest of Europe. ICIEC itself has little exposure in the US and Europe, which resulted in the corporation paying out a modest $1.6m in claims, although some of the money was recovered later. The good news for ICIEC is that while the loss ratio (the percentage of premium income used to pay claims) for the overall industry was 80 per cent, the corporation’s loss ratio was a mere 15 per cent.

“In our industry,” explained Dr Taha, “you get a feel of the coming storm before the rest of the economy because in our system we have a NPL (notification of probable loss) and the policy holder is obligated to inform us whenever he feels that there are problems looming. For instance, if one of his buyers delays payment he must immediately inform us, and we immediately take action to see what can be done to mitigate claims or minimise the problems.”

The corporation also reviewed its credit limits approved for policy holders, cancelling or reducing some and instituting more stringent underwriting conditions. By doing this, it avoided a lot of possible defaults and claims, mainly from buyers getting into trouble because their sales were down due to the recession. Not surprisingly, ICIEC’s volume of insured business in 2009 was reduced substantially by 29 per cent. The actual implementation of credit limits approved (declared shipments or implemented projects) declined from $1.4bn in 2008 to $1.03bn in 2009. New approvals increased from $1.7bn to $2.1bn for the same period, thus suggesting that its customers had the intention to carry out new business and applied for credit limits, which it approved.

The implementation was less because there was no financing because of the credit crunch. Although ICIEC’s new business increased by 25 per cent, the actual implementation of new underwriting declined by 30 per cent. However, its premium income declined by five per cent only, because it had a big increase in medium-term export credit insurance, whose premium is much higher than the short-term business. In fact in 2009, medium-term business increased substantially to account for 40 per cent of total underwriting business.

“The biggest demand for medium-term project business insurance is in Sudan, which is our biggest market,” said Dr Taha. “We are also supporting a new breed of companies that I call ‘Third World Multinationals’. When we talk about multinationals we mention BP, Shell, Microsoft, Nokia, IBM etc – all first-world companies. But now we have giant companies in our region who are investing all over the world – for example, SABIC, Saudi Aramco, Etisalat, Orascom. There are also other companies that we do not hear about – for example, the Egyptian Suweidi Electric Group, the cable manufacturer and electricity turnkey contractor and one of our largest customers. We supported them in projects in Sudan, Ethiopia and Syria; and they have cable factories in Sudan, Syria and Saudi Arabia etc.

“ICIEC contributed to the transformation of these companies into multinationals because by using our political and investment risk insurance they were able to enter markets that otherwise they would not have been able to do business in, therefore enabling them to invest and trade in countries which otherwise are perceived as high risk. That is the real value of credit and political risk insurance,” maintained Dr Taha.

The credit and political risk insurance message seems to be getting through. The demand for ICIEC products in the first quarter of 2010 has surged with new commitments for the period compared with the same period in 2009 increasing by 50 per cent from $474m to $710m. The actual business insured increased by 77 per cent from $228m to $403m. This is partly due to business not done in 2009 coming back on track, but a good part of it is really new business and new customers.

The major breakthrough is that banks in the region are now realising that export credit and political risk insurance works, and it enables them to expand into an area that banks in the developed countries consider bread-and-butter business. Also, with more competition and new markets opening, banks are increasingly forced into cross-border business.

However, in the ICIEC-member countries crossborder business is always risky. This has resulted in more banks coming to ICIEC. This process was also helped by the fact that ICIEC was rated early last year AA3 by Moody’s Investors Service, which was re-affirmed in November 2009 after the impact of the crisis. This emphasises that ICIEC is important because credit insurance without banks accepting it has no value.

But if ICIEC’s business continues to expand, is there a chance that the corporation will increase its capital? Dr Taha suggests that business is expected to continue to increase and at this rate he predicts that by the end of 2010 the corporation will exhaust its capacity. “Our subscribed capital is $250m. This gave us a capacity of about $2bn. We also use reinsurance so, on average, we cede about 40 per cent to the international reinsurance industry especially to Lloyds and others. Reinsurance is fine because it is risk sharing. But it does not come free. They share your risk with you but they also share your income.”

The corporation also has a huge pipeline of new business. The size of some of the projects has increased from $20m a few years ago to more than $300m now. Dr Taha remains confident that ICIEC’s board will support any further increase in capital, although it can also raise money from the markets.

In the pipeline are a series of next-generation products, which underlines ICIEC’s cutting edge pre-eminence in its field. The corporation is working on launching a Letters of Credit (LC) Insurance Fund (LCIF) in which both the issuing banks and the confirming banks can invest on the basis of Cooperative Takaful.

It currently has a product called a Documentary Credit Insurance Policy, which it issues to confirming banks in exporting countries. This policy enables such banks in, say, Saudi Arabia, Malaysia and Turkey to accept LCs from countries that are considered high risk, or from banks that are not normally accepted, or that are accepted but which have small limits.

“We are now aggressively marketing this product and the potential for the volumes generated are huge. Last year with one Saudi Arabian bank alone we did close to $500m of business because the bank in question was confirming LCs from oil-importing countries. These are oil LCs. Now banks from Bahrain, Egypt and elsewhere are subscribing to this product,” confirms Dr Taha.

Another burgeoning new market is the global Sukuk market, which is currently estimated at about $150bn of papers outstanding. ICIEC is, in fact, working on a Sukuk Guarantee Fund. In the wake of the financial crisis a small number of Sukuk have defaulted. Sukuk, by their very nature cannot be guaranteed by the issuers, but can be guaranteed by a third party. This puts ICIEC in an ideal position to be able to provide the insurance depending on the risk or the nature of the underlying transaction.

“We have estimated that once the market returns to normality, new Sukuk issuance would top $30bn. If we assume that a third would actually go to the market we are talking about $10bn of issuances,” adds Dr Taha.

Both the LC Guarantee Fund and the Sukuk Guarantee Fund, he says, should bring good returns to investors because the risk is not very high. It is not like trade credit, where the risks are high. The track record of LC business is good because defaults are very rare. Central banks even in the least developing countries make sure that the commercial banks do not default on LCs, because it is not good for the reputation of the country. In 16 years of insuring LCs, ICIEC has never had a single default. There were a few payment delays but these were sorted out with the respective central banks.

In the past 10 years it has underwritten more than $10bn of insurance business. Of this, it facilitated $8bn of trade finance backed by its insurance. The cost has been minimal for the corporation has paid out only $24m in claims, of which half were subsequently recovered.

There are several other new opportunities emerging. Dr Taha, for instance, chairs the IDB’s Special Task Force to promote synergies between the various entities in the group as part of a reform process aimed at developing the IDB into a world-class multilateral development bank (MDB). This has resulted in greater cooperation between ICIEC, the Islamic Trade Finance Corporation (ITFC) and the Islamic Corporation for the Development of the Private Sector (ICD).

ICIEC has issued a specially designed insurance policy for the ITFC for unsecured business. Traditionally, trade financing at the IDB was always backed or secured by bank guarantees. The IDB is also promoting PPP (Public Private Partnerships). The private sector part of this partnership needs to be insured. For instance, if the IDB were participating in a power project, the private sector party would require sovereign risk insurance. Usually there is an off-take agreement with the national electricity company, and that needs to be insured.

It is part of ICIEC’s mandate also to support Export Credit Agencies (ECAs) in the OIC member countries, which is says it is doing mainly through reinsurance. In fact, it has such agreements with eight ECAs, with the latest one signed with the Oman Export Credit Agency in March.

Over the past few years ICIEC has liberalised its underwriting regime, allowing the insurance of business between a member country with non-member countries. The original aim was for ICIEC to insure intra-trade between IDB member states, which is very little. A new development will be for ICIEC to insure strategic goods imports from non-member countries to member countries.

ICIEC is also keen to insure part of the domestic sales of its policy holders. For example, ICIEC currently insures the exports of the Saudi Basic Industries Corporation (SABIC), the world’s largest petrochemicals exporter. However, SABIC also sells in Saudi Arabia on credit, and is keen for ICIEC to cover its entire portfolio. Dr Taha is all too aware that the big European insurers are coming into the Middle East markets. As such, he acknowledges that ICIEC has to meet customer demands to stave off the competition.