Ex-Im Bank-a new role in partnership with the private sector. (International Affairs Section).

It is clear that the interest in credit insurance and ancillary trade credit risk transfer products has been very strong over the past several years in the U.S. Premium growth out of the private sector carriers for both domestic and export coverage, which includes political risk coverage, has grown at a pace beyond U.S. GDP over that period of time. The private sector has been able to develop new product and take on greater risk, particularly export and political risk, than they had been willing to accept in the past. Added reinsurance support, greater underwriting expertise and a larger premium base within the industry have made their task more feasible. Incorporated in Ex-Im Bank's charter are provisions that prohibit it from competing against the private sector. Without this provision, and without Ex-Im Bank's general adherence to it over the years, it is very likely that government involvement would have had a stifling effect on the development of the private sector export programs. It is also proper to n ote that most of the respective government managed credit insurance agencies in the EU have pulled back from competing with the private sector. This has allowed more opportunity for the private sector carriers to expand their programs.

The private sector is, however, experiencing growing pains. One of the constraints that must be addressed is available capacity for private sector political risks reinsurance in the emerging markets. It is getting increasingly difficult for the private sector carriers in the U.S. to find this reinsurance capacity. A few of the customary reinsurance carriers have suddenly pulled Out of the business line for the 2002 treaty year. Even with the very good underwriting results over the past 10 years on the political risks lines, lack of capacity is having a dampening effect on growth. Underwriters now understand more clearly the dramatic impact that acts of terrorism could have on their political risk results. Private sector carriers must look carefully at their war coverages and determine if modifications in policy language are needed as a result of terrorist acts. The economic crises in Argentina resulting in, among other things, devaluation and currency transfer controls have further caused a weak reinsurance m arket to become weaker. It was not long ago that Argentina was rated as a very acceptable risk by most private sector carriers. There is a heightened awareness of underwriting political risk. Appetite goes down and price goes up.

Though the concept may seem appealing, structuring the program and its implementation is another matter. Both Ex-Im Bank and the private carriers need to think differently about their relationship. Historically, if the private sector turned the risk down or could not manage to underwrite it, they had no difficulty in Ex-Im Bank picking up the standard. As we enter a new era of political risk uncertainty, we can expect the private sector to be more selective at precisely the time when demand for the coverage will be increasing.

In order for Ex-Im Bank to move in the direction of a reinsurer of last resort vs. an insurer of last resort the basic tenants of it mission must be maintained. That mission is to expand U.S. exports and create U.S. jobs. It is also appropriate that Ex-Im Bank and the private sector have terms and conditions of their relationship that are mutually beneficial and structured to provide the basis for a long term program. A broad outline of these terms might include the following:

* The private sector should take some form of first loss exposure on the risk. This implies that Ex-Im Bank would be at risk at a level above the private carriers' current treaty.

* The private sector carrier should have an appropriate level of underwriting expertise and have the appropriate financial strength to honor claims. Ex-Im Bank will have to provide significant underwriting autonomy to the private carrier but should do so only if the carrier is capable of executing that authority properly.

* Ex-Im Bank will honor claims only that meet their U.S. content requirements.