New Swiss Re sigma study on credit insurance and surety
Rapid rise of international trade creates growth opportunities for credit insurance and surety in the emerging markets and in OECD countries. Risk management holds the key to success for insurers.
November, 2006 – Credit insurance compensates companies when their clients fail to pay for goods or services. Surety compensates beneficiaries when the obligor defaults on a contractual, legal or regulatory obligation. These two lines of business are crucial to the economy. By shifting risks away from companies and public institutions, they facilitate commerce and contribute to economic stability and growth. According to Swiss Re’s latest sigma study, “Credit insurance and surety: solidifying commitments”, values secured through credit insurance and suretyship last year totaled an estimated USD 2 900 billion. This corresponds to 6.5% of world gross domestic product (GDP).
Credit insurance and suretyship are an important part of the overall market for credit risk transfer. They accounted for 3% of the nominal value of global credit risk transfer as of year-end 2005. Niches in which credit insurers and surety companies are particularly active include export trade, domestic sales to the retail and construction sectors, and contractors doing business with public institutions.
Global trade fuels credit insurance demand
Total premiums for credit insurance were USD 6.9 billion in 2005. Credit insurance has a long tradition in Western Europe, but is less well established in the US. Four globally active credit insurance groups lead the world market, with a combined market share of over 80%. These groups, which are monoliners, continue to grow through product innovation, overseas expansion and acquisitions.
Demand for credit insurance is driven by growing international trade: since 1950, global trade has risen by 6.2% per year in real terms, versus 3.8% for global output. Furthermore, increasing specialisation by manufacturers and service providers supports credit insurance, since it entails more production stages requiring protection.
There is huge potential for export and domestic credit insurance in the expanding Asian and Central and Eastern European economies. The US market, whose ratio of premiums to GDP suggests that it is less highly penetrated than other major markets, is also expected to grow briskly. In the mature European markets, small and medium-sized enterprises (SMEs) are a promising segment that credit insurers have yet to fully address.
Infrastructure projects drive surety demand
Global surety premiums totaled an estimated USD 7.9 billion in 2005, more than half of which were written in the US. This tightly regulated business is characterised by very stable growth. The largest surety writers are general insurers that typically concentrate on their domestic markets. The surety business has substantial growth potential in the less penetrated Asian and European markets and the Middle East, particularly once these markets develop legal and regulatory frameworks for surety.
Most of the rising demand for surety stems from government infrastructure projects. New funding programmes like the Public Financing Initiatives (PFIs) in the UK are also going to create opportunities for surety writers, such as enhancing the creditworthiness and guaranteeing the performance of contractors.
Risk management benefits insurers and their clients
Controlling and managing risk exposure is key to success in credit and surety. In the wake of past adverse experience, credit insurers and surety companies have invested heavily in strengthening their risk management capabilities. Their enhanced risk information has improved portfolio transparency and thus facilitates portfolio steering and risk management, better enabling companies to meet future economic challenges.
About Swiss Re
Swiss Re is the world’s leading and most diversified global reinsurer. The company operates through offices in over 30 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company’s traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management. Swiss Re is rated “AA–” by Standard & Poor’s, “Aa2” by Moody’s and “A+” by A.M. Best.