Trade credit insurance in the United States - a new platform. (International Affairs Section).

Though trade credit insurance was first developed in the United States over one hundred years ago, it has lagged significantly in its development as a mainstream risk transfer product. By comparison, the business in Europe is well developed with revenues from the various EU carriers at about 10 times of those in the U.S.--$3.5 billion vs. $350 million in the U.S. The GDP of the U.S. is only slightly smaller than the EU. Only recently did the U.S. credit insurance markets begin to show the double-digit revenue growth that would indicate greater market awareness and market acceptance. This added market stimulation has attracted some new entrants into the industry. Squeezing underwriting profits out of this revenue growth has been another matter. Though it is rare to see underwriting results for the credit insurance business line published in isolation, it is generally agreed that profits over the past five years have been spotty except for one or two that seem to have come to grasp the proper risk reward parame ters. Catastrophic events such as the Kmart bankruptcy, the Argentine collapses (finally) and Enron with its collateral fall out will have an adverse impact on the underwriting results of most U.S. carriers. Reinsurance treaties will be renegotiated which will in some measure cause the price of coverage to go up and the selectivity of risk to be more conservative. The balance of 2002 will be a year of retrenchment in the industry.

There are always at least two ways to look at any set of facts. The fact that the EU market is ten times larger in revenue than the U.S. could, and often is, viewed as evidence of a wonderful opportunity for expansion and fertile ground for profitable growth. On the other hand, it could simply be viewed as the failure over an extended period of time of the product to meet the unique needs, demands and characteristics of the U.S. marketplace.

The European credit insurers' business is anchored around the whole turnover product. The policyholder is required to submit for underwriting the full range of their customers for coverage, and the underwriter will review and vet those customers that are deemed to be an acceptable credit risk. Those that are acceptable are approved for coverage and those that are weak credits are eliminated from the policy. The policyholder gets the benefit of having their core clients covered and the added benefit of the knowledge that those that were rejected were customers of weak credit standing and, therefore, customers that they should not be doing business with anyway. There is often a difference of opinion between the insured and the insurer as to the credit quality of a particular risk, This difference of opinion often becomes a source of ongoing friction between insured and insurer. Policyholders apparently find the opinion of their credit insurer concerning the credit quality of their customers more valuable in Eur ope than they do in the U.S. In essence, a loss prevention product is sold in tandem with credit insurance. Pricing and structuring of polices in terms of deductibles, retentions, rate structures and other special terms and conditions are generally rather routine and standard. The underwriter will try to control the risk through vetting of credit limits as opposed to policy structure and price.

The U.S. has a very aggressive credit culture and most companies, even middle market and SMEs, have good expertise in credit assessment and risk management particularly in their respective industries. Certainly, the ...