Credit Insurance: A powerful force during uncertain times

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“About 13-14% of cross-border trade is supported by export credit and investment insurance. Last year, that amounted to $2.5 trillion. It is a powerful force.” 

As Secretary-General of the Berne Union, Vinco David leads a trade association whose members play a vital role in the global economy. His career spans over 30 years in the credit insurance industry, and he is also a novelist having published three books so far.

In this interview, Vinco explains the role of export credit and investment insurance in international trade, the current trading environment, and how he manages to combine a career in trade with writing novels. 

Q: What is the role of export credit and investment insurance in international trade?

David: Export credit and investment insurance play a very important role. About 13-14% of cross-border trade is supported by export credit and investment insurance. Last year, that amounted to $2.5 trillion. It is a powerful force. Not in all trade segments and maybe not even for all countries, but certainly for capital goods it enables many transactions that would otherwise not be conducted. 

In terms of the benefits of using credit insurance, there are both direct and indirect ones. The most obvious benefit is risk mitigation for exporters, that is, protecting against payment loss. But using credit insurance also has some other benefits. One of them is that it enables a more stable cash flow for companies. When you are sure that the bill will be paid, either by the buyer or the insurer, you can plan and budget more effectively and achieve more stable cash flows. Very important as well is that credit insurance enables more bank financing, in one of two ways. Either the credit insurance policy to an exporter is assigned to a bank by way of collateral, allowing the bank to provide more finance. Or it can be by providing direct cover to the bank, so called buyer’s credit, meaning the bank gets the cover and is then prepared to finance the export transaction. 

While those are the direct benefits, there are also indirect benefits of using credit insurance. One of them is making marketing by the seller much more effective. If a seller learns from the credit insurer that a buyer is simply not creditworthy, you simply stop marketing to that customer. Another indirect benefit is that it will allow you to enter into markets that you would otherwise not have entered into because they were too risky or unfamiliar. Ultimately, the benefits of using export credit and investment insurance are not just achieving risk protection, but there are also benefits in terms of managing the operations of the company.

Q: As Secretary-General of the International Union of Credit and Investment Insurers — or the Berne Union — you represent the organisations operating in this space. How do they see the current trading environment and are they concerned or optimistic about the future?

David: When we talk about the current business environment, at the end of 2019, there is uncertainty. Now, uncertainty has always been an attribute of international trade. There is uncertainty in managing geopolitical risk. There is the uncertainty of where we are in the economic cycle. There is uncertainty stemming from digital evolutions, or as some call them, revolutions. What do these changes mean to the future of companies and the way trade is conducted? 

What is quite unique is that these uncertainties interact, whereas until recently you could say that, well, there is uncertainty but we can manage that uncertainty. For example, if there is political violence somewhere or if the economic cycle is turning, then these did not interact that much. But what we see today is that geopolitical factors, such as trade wars, where we are in the economic cycle, and digital transformation all interact. And that makes the analysis even more complex. So uncertainty is dominating the market and we really do not know where that will lead us to during next year or the year after. That is what is unique. 

But we are seeing some fallouts already. The US-China trade war has not had any casualties in terms of people dying but exports from China to the US have plummeted. But on the other hand, exports from countries such as Taiwan, Vietnam, and Bangladesh have grown. This is a sign that manufacturing has already been relocated from China to other South and East Asian countries. 

Another fallout that can already be seen is that the impact of the trade war is not only felt between China and the US but has wider consequences. For example, European companies rely on Chinese subsidiary companies to export directly from China, and these companies are also affected by the trade war as there is less revenue flowing from China to their parent companies in Europe. 

A third fallout is that trade on the global level is not growing much and might in fact be decreasing in 2020. And that has a direct impact not just on the prosperity of each one of us but also on the industries that are directly related to trade flows. Credit insurance insures trade flow. So if trade flows are stagnating, the credit insurance industry will be directly affected as well. Looking at data from the first half of 2019, we can already see overall stagnating growth by our members. 

Q: Trade finance providers appear to increasingly rely on credit insurance. In fact, a number of newly established trade-focused fintechs have incorporated credit insurers onto their platforms so they can immediately be matched with funders. Why is this convergence occurring and why now?

David: Much of this is market-driven, it is what companies want. But it is true that some, although not all, of new operational platforms combine finance of exporters with insurance or sometimes even other services such as customs clearance. We still do not know which of these platforms will make it in the end, as many are still proof of concept and very few have grown beyond this stage. But one fact is certain, namely that much more trade in future will be financed by platforms, even if we do not know which ones yet. 

Now, there are various platform models. One is that insurance companies or banks set up their own platforms. The advantage of that is the certainty that there will be a flow of business to the platform, which is that of the company itself. The disadvantage is of course that it is far from certain that others in the market, their competitors, will want to use their platforms. So the growth prospects of a company-specific platform are not great. A solution to this problem is to ask a third-party to build a platform, avoiding the competitive sensitivities relating to using the platform. The disadvantage to the third-party platform is that there is no guarantee that companies will in fact utilise the platform. The third model is that a business association with multiple members build a platform. If you can get that done, it is a good solution but it requires the association manages to bring all the members in the same direction, which is a big challenge as well. 

Each of these three models to build platforms have their advantages and disadvantages. As a credit insurer you have to be prepared for business to increasingly be done on platforms, especially the so-called short-term or whole turnover business. The export credit business will most likely remain more tailored or customised to the needs of an exporter and its financier, but certainly for short-term trade finance. 

Q: With international trade having so many moving parts, how do insurance professionals assess credit and political risk?

David: Insurance professionals are highly skilled people. They are well-educated and they are experts in their fields. And while it is true that there are many moving parts, the important thing remains that you assess the creditworthiness of the buyer and the political risk of the country of the buyer. That has not changed. 

What has changed is that the creditworthiness of the buyer is now impacted by new factors compared to only a decade ago. Nowadays, much of a company’s balance sheet is not tangible but intangible. That’s brand name, reputation, network, etc. And that’s more difficult to assess compared to hard assets. But once again, the underwriters in credit insurance are skilled and have moved with the developments.

Q: What does your role as Secretary-General of the Berne Union entail and how did you get to where you are today?

David: Well, I’m as good as the team is. So my role is to stimulate and motivate the team so they can do what they are good at. I do have a role when it comes to strategy, HR management, and the direction of where we as an organisation with 86 members worldwide want to go. 

One of our main objectives at the moment is to facility the exchange of information between our members, both at the level of data-sharing and macroeconomic insights, the creditworthiness of individual buyers, marketing, products, and so on. Another key objective is to encourage our members to network between themselves and other stakeholders in the industry, such as banks or brokers, or the media. And a third objective is representing the industry’s interests to the media and to various regulators. An important aspect of this final objective is to educate regulators about the benefits of credit insurance, in particular when it comes to banks as it can allow them to lower their capital requirements. 

In addition I’d like to add a more recent objective, which is to engage with young professionals. To attract them to our industry and to retain them in our industry. We should be attractive to young professionals. 

As for the second half of your question, I always felt attracted to the international work of the Berne Union. My background is Atradius, a credit insurer. That is where I spent the majority of my working life. Actually, before that I started at the Dutch Ministry of Finance but quickly discovered that I preferred private enterprise to being a civil servant. But I always had an interest in the interaction between private enterprise and government. And that is one really important aspect of credit insurance. Export Credit Agencies, which are public insurers, have a link with private companies, exporters, and their governments. But private insurers also have a 

strong link to governments, because they are highly regulated.

In my credit insurance career, I have worked my way through various positions including underwriting, claims, country analysis, project finance, junior management, middle management, senior management. I was already on the non-executive board of the Berne Union for a number of years before this position became available. 

Where I am now is a fantastic position. In the middle of the world economy, in the middle of credit insurance. Credit insurance is a truly fascinating business, but relatively unknown to the general public. But we are dealing with the world economy on a macro-scale and with individual companies on a micro-scale, and that is what makes it so exciting.

Q: I was surprised to learn that you are also a novelist and have published three books! How have you managed to have two careers and what advice would you give to someone who would like to pursue different passions simultaneously?

David: I would call my work in credit insurance a career, but I would not call my writing a career. I would rather call that a vocation. So I have a profession and a vocation. If you really want to work on this vocation, in my case as a novelist, you really need to set aside time. A fixed amount of time every week that you keep to. Otherwise there are always more important things to do than to write. So you dedicate the same time every week, a certain time slot, and then you write. 

I must admit that since joining the Berne Union almost three years ago now I did not have much time to also write, so it is on the back-burner, perhaps a few hours per month. But I am currently working on finalising my third novel, which will be my fourth book in total having as I have written two novels and one travel stories book so far. I am quite hopeful that I can finish my third novel around the end of this year.