Postmodernism in Trade Credit Insurance

1. Postmodernism in Trade Credit Insurance The beginning of the end or the end of the beginning? ICTF – October 2013 Stephen Taylor, Executive Client Director Aon Trade Creditt: +44 (0) 207 086 1631  |  m: +44 (0) 773 0193356e: stephen.taylor2@aon.co.uk|  thehub.aon.co.uk

2. Agenda • A quick recap • What is credit insurance? • Benefits • Why credit insurance matters? • Beginning of the end? • UK perspective • Impact of credit crisis • How the credit insurance industry has adapted? • End of the beginning? • Global perspective • Practical credit management solutions • Future predictions Aon Risk Solutions | Global & Specialty Clients | Trade Credit

3. A quick recap.....what is traditional credit insurance? • Protects the “debtor” asset • Insures against non-payment (credit & political risks) by the debtor i.e. bad debts • Relates to B2B transactions • Trade related (not a financial guarantee) • Covers domestic sales & exports • Purchased by SMEs, corporates, multinationals • Discretionary purchase • Different policy structures, .e.g. ground up, top account, catastrophe • Purchasing drivers vary for each business Bank Advance payment Goods / services on credit terms Seller Buyer Payment for goods / services Beneficiary Premium Insurance Insure credit risk Credit insurer Bank involvement where financing Aon Risk Solutions | Global & Specialty Clients | Trade Credit

4. A quick recap.....the benefits Risk transfer - Transfers credit risk to insurer’s balance sheet - Reduces bad debt provision Risk prevention - Identifies and avoids expected losses - Greater insight into customer’s likelihood to default Protects from bad debt Enhances working capital • Facilitates access to improved financing • Balance sheet engineering • Additional banking lines Embeds credit management disciplines • Enables companies to extend credit terms • Reinforces credit management • Access to credit risk expertise and analysis Helps grow your business • Supports mergers and acquisitions • Promotes sales growth whilst maintaining credit management controls • Directs and supports sales to higher margin markets Aon Risk Solutions | Global & Specialty Clients | Trade Credit

5. Global market share – why credit insurance matters! Source: ICISA Globally trade credit insurance covers nearly €2tn of commercial exposures Equivalent to 15% of global business receivables on credit terms Aon Risk Solutions | Global & Specialty Clients | Trade Credit

6. Current dynamics – impact on credit insurance? • Economic & Political • US debt ceiling – sorted for now! • Japan – stimulus package • Government debt levels – how long can these keep increasing? • Low interest rate environment • Political Risks, e.g. Egypt • Financial Institutions • Impact of Basel III • Increase in demand for less conditional credit insurance products • Solvency II • How will this impact insurers – capital allocation and pricing? • Social Media • How to manage the information flow? Aon Risk Solutions | Global & Specialty Clients | Trade Credit

7. The beginning of the end?

8. A question of perspective – UK statistics (Source ABI) Aon Risk Solutions | Global & Specialty Clients | Trade Credit

9. Observations – UK market • 2002 to 2012: • Policies purchased down 15% • Average premium rates down 30% • Business insured increased by 48% • Total premium relatively flat over period Aon Risk Solutions | Global & Specialty Clients | Trade Credit

10. 2008 Credit Crisis – credit insurance hits the news! "Credit insurance takes centre stage" – Financial Times Oct 2008 "Companies feel chill as trade credit insurance dries up" – Financial Times Nov 2008 “Trade credit insurance withdrawal bites” – The Telegraph Nov 2008 "Blow as credit insurer halts cover" – The Independent - June 2008 “Woolworths hit by credit insurance withdrawal” – UK business news Oct 2008 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

11. 2008 - Client Experience Credit limit cancellations and reductions Increased rates and tighter commercial terms Claims under greater scrutiny Aon Risk Solutions | Global & Specialty Clients | Trade Credit

12. Impact on the insurer market • Business model unable to respond to economic storm • Claims haemorrhaging • Capacity and appetite reduced • Rebalancing of exposure/premium ratio • More stringent risk underwriting model and greater sector weighting • “Survival” rather than growth objectives • Increase in rates by circa 40% • Government involvement 11

13. 2008 – common comments from clients • “The umbrella is taken away when it rains! – Insurer withdraws cover at a key time” • “The insurer doesn’t provide a notice period prior to withdrawing cover” • “I will pay more for additional capacity” • “Cover is expensive” • “Will claims be paid?” How did insurers adapt? Aon Risk Solutions | Global & Specialty Clients | Trade Credit

14. 2013 solutions – how credit insurance market has improved • “The umbrella is taken away when it rains! – Insurer withdraws cover at a key time” Growth in XoL ‘non cancellable’ credit insurance product • 2008: • Ace, AIG, Atradius Special Products • Others where small number of endorsed limits • 2013 • Ace, AIG, Atradius Special Products, Equinox, Euler Hermes, Markel, QBE, XL • Others where small number of endorsed limits Aon Risk Solutions | Global & Specialty Clients | Trade Credit

15. 2013 solutions – how credit insurance market has improved • The insurer doesn’t provide a notice period prior to withdrawing cover” Notice period on credit limit changes • 2008: • No notice period unless specifically negotiated. • 2013: Delayed effect / grace clauses • Atradius: 30 days+ • Euler Hermes: 30 days+ • Coface:30 days+ • How much further will notice periods increase? Aon Risk Solutions | Global & Specialty Clients | Trade Credit

16. 2013 solutions – how credit insurance market has improved • “I will pay more for additional capacity” Top-up Cover • 2008: • “limit plus” from Aon • Other insurers – selective basis • 2013: • Coface “Top Liner” • Euler (CAP) • Atradius • “limit plus” from Aon • Other insurers – selective basis Aon Risk Solutions | Global & Specialty Clients | Trade Credit

17. 2013 solutions – how credit insurance market has improved • “Will claims be paid?” • The market has paid claims...for example: • Schlecker • Game • Centrotherm • Petroplus • Ukraine/Kazakhstan Banks • Korea Line • Libya • Claim payment response times have improved Aon Risk Solutions | Global & Specialty Clients | Trade Credit

18. 2013 solutions – how credit insurance market has improved • “Cover is expensive” • Increase in market capacity. • Softer market • average premium rate 0.11% (2012) versus 0.13% (2006) (UK) • BUT, price is only one aspect • Key is the value proposition Aon Risk Solutions | Global & Specialty Clients | Trade Credit

19. Trade credit insurance – value proposition Information 10 Cost 100 Value to the Insured Aon Risk Solutions | Global & Specialty Clients | Trade Credit

20. Trade credit insurance – value proposition Information 10 Sales 20 Cost 100 Value to the Insured Aon Risk Solutions | Global & Specialty Clients | Trade Credit

21. Trade credit insurance – value proposition Information 10 Sales 20 Cost 100 Cover 20 Value to the Insured Aon Risk Solutions | Global & Specialty Clients | Trade Credit

22. Trade credit insurance – value proposition Information 10 Sales 20 Cover 20 Cost 100 Finance 100 Value to the Insured Aon Risk Solutions | Global & Specialty Clients | Trade Credit

23. 2013 - Credit Insurance • Credit management view of trade credit insurance changed? • More focus on value of product • Additional investment in risk information/systems • New solutions used to manage credit and political risk • Captives utilised where appropriate • Insurer model improved • Balance sheets survived the crisis • Reinsurance position positive • Total Potential Exposure more closely reflects actual insured business • High quality of risk information held • Better value proposition Aon Risk Solutions | Global & Specialty Clients | Trade Credit

24. The end of the beginning!!!!

25. 2013 - Observations • Broker role changing • Technical knowledgeand service important • Risk advisory/consultative • Integrated Credit, Political Risks and Surety offering • Global credit insurance market is growing • Purchaser behaviour is more sophisticated • Insurer product offering is improving Aon Risk Solutions | Global & Specialty Clients | Trade Credit

26. Credit, Political Risks & Surety: Product Overview High Medium Demand Low Low Medium High Supply - Market Capacity Subjective: demand / supply side will move depending on the risks/geographical location Aon Risk Solutions | Global & Specialty Clients | Trade Credit

27. Practical credit management solutions • Scenarios • Insured doesn’t want to rely on insurer credit limits – ‘tail wagging the dog’ • Insured only worried about concentration risk • Insured wants to include Insurer risk information within credit management model • Opportunity to increase sales with the buyer, but the buyer doesn’t want to increase collateral • Insured wants to improve financing: • Trade Finance • Financial Institution use of product Aon Risk Solutions | Global & Specialty Clients | Trade Credit

28. Self underwritten programme • The problem: Insured doesn’t want to rely on insurer credit limits ‘tail wagging the dog’ • Large multinational – European sales • Client wanted greater autonomy setting credit limits • Sophisticated credit management • Good visibility of customers financial strength • The solution: • Self underwritten programme - full autonomy in the Insured’s credit management • XoL structure -100% cover sitting in excess of bad debt provision/captive Aon Risk Solutions | Global & Specialty Clients | Trade Credit

29. Single risk & syndication • The Problem: Insured only worried about concentration risk in portfolio • Global company • Client worried about impact of bad debt on share price • £100million exposure on single automotive risk • The Solution: • Syndicated Single Risk • 5 insurers • Claims co-operation agreement • Non-payment Cover - 90% Indemnity • Cost of insurance transferred to the Obligor via a finance charge Aon Risk Solutions | Global & Specialty Clients | Trade Credit

30. Top Account Individual losses over policy period Covered “top” account Uncovered account First loss level Top account level • Covers key exposures, to which real catastrophe risk attaches. • It is ideal for companies that have no requirement to insure its entire ledger, yet wish to cover its largest strategic buyers. Covered top accounts must be named buyers and a valid credit limit must be in place. A claim can be payable for the whole loss amount – above the first loss level. If it is a top-trader, limits must be applied for on all exposures above a pre-agreed level Aon Risk Solutions | Global & Specialty Clients | Trade Credit

31. Risk Intelligence • The problem: insured wants to include Insurer risk information within credit management model • Global company - telecoms • Investment in credit management model • Wanted to benefit from ‘live’ risk intelligence • Did not want to purchase insurance • The Solution: • A few potential solutions: • Insurer risk information only • Independent credit management software company • Aon Trade Manager • Helps with debtor analysis, portfolio management and data transparency • Helps reduce DSO • Risk concentration more accurately identified • Insurance purchased selectively Aon Risk Solutions | Global & Specialty Clients | Trade Credit

32. Supply Bond: helping the buyer increase sales! • The problem: opportunity to increase sales with the buyer, but the buyer doesn’t want to increase collateral. • Retail sector. £10million current exposure secured by Letter of Credit • Opportunity to increase to £30million • Buyer did not want to provide an increased Letter of Credit, due to impact on its financing facilities • The solution: • Surety markets used to issue a supply bond • On demand bond • Buyer’s finance facilities improved • Increased Sales • Niche solution Could also use credit insurance, if conditional wording accepted Aon Risk Solutions | Global & Specialty Clients | Trade Credit

33. Trade Finance • Insured wants to improve financing: Invoice discounting process Buyers Collection account Payments Receivables Invoicing Sales Bank purchases AR from seller for up to 100% of face value Seller Bank Seller pays interest monthly in arrears based on daily LIBOR Joint insured Joint insured Credit Insurance (90% to 100%) Aon Risk Solutions| Global and Specialty Clients | Trade Credit

34. Financial Institutions: use of product • Credit Insurance is used to support a number of areas: • Supply Chain Finance • Trade Finance • Export Finance • Revolving Credit Facilities • Acquisition Finance • Bonds • How can non-payment insurance be used to help your company’s financing? Aon Risk Solutions | Global & Specialty Clients | Trade Credit

35. Future Predictions • Improved Insurer model to weather the next economic downturn • Globally multi-debtor and XoL markets will grow • Geographical hot spots • Single Risk & Syndication will become more important • Financial Institutions use of product will increase • Use of risk intelligence products will increase • Broker expertise, innovation and approach important Aon Risk Solutions | Global & Specialty Clients | Trade Credit

36. Thank you for listening Stephen Taylor, Executive Client Director Aon Trade Credit t: +44 (0) 207 086 1631  |  m: +44 (0) 773 0193356e: stephen.taylor2@aon.co.uk|  thehub.aon.co.uk Aon Risk Solutions | Global & Specialty Clients | Trade Credit