Export credit agencies in vogue

For some industries, good things come out of bad. Export credit agencies (ECAs) are again stepping out in style. Richard Burton of Coface talks about the outlook for ECAs in Asia.

Q: Post-Asian financial crisis, are export credit agencies (ECAs) in vogue again?

A:  The Asian crisis had the impact of bringing ECAs a little more to the forefront. Our view is that although currently, a majority of Asian companies don't use credit insurance, it is gaining popularity because they (the Asian companies) are competing more and more in the international scene with companies that are able to deal on open account terms. Credit insurance can play an important part in making trading on open account easy and reliable because it helps the seller to choose good buyers, help with collections, and of course guarantees the payment.

Q: And why don't Asian companies use credit agencies?

A:  Possibly it is a question of awareness. Secondly, it may that, traditionally, Asian companies have used letters of credit as a form of guarantee. Another issue has been financing and the readiness of banks in Hong Kong to accept credit insurance as a security for financing an exporter. But thanks to Hong Kong Export Credit Insurance Corporation in Hong Kong, there have been some moves by local banks to accept credit insurance policies as guarantees. But there is still some way to go before the banking community accepts credit insurance as adequate security for financing to exporters

Q: ECAs have been described as cumbersome, costly and bureaucratic compared with the fast moving commercial markets. Do you think that that description is warranted?

A:  Maybe a few years ago it was, but these days, we are in a highly competitive business environment and there is the pressure to be more efficient. Therefore, there has been a fundamental change in credit insurance over the past few years, particularly in short term credit insurance, which is principally the domain of the market. Even in relation to the government dominated medium and long term credit insurance sector, there have been changes. This is because governments themselves have become more and more cost conscious, and performance measures have been introduced to measure the service provider. This means that quality of service will improve.

Q: And what are the fundamental changes?

A:  The credit insurance industry has been going through a very rapid consolidation. This has been driven by loosening of barriers to trade in many countries, a need to service multinational clients, the increasing use of technology, and the need to find economies of scale. The need to be cost effective is due to competition from inside and outside the industry, and this has put pressure on insurer's margins.

Q: How has deregulation and privatization of the commercial markets in Asia affected the market share of the ECAs?

A:  In Asia, the deregulation of commercial markets is gaining momentum. This means that from an export credit insurers perspective, there are more buyers to know and to cover in Asia. In reality what is happening as well, is that the traditional relatively clear distinction between political and commercial risk is now becoming less and less clear. This will affect the way export credit insurers analyze risk.

For the ECA operating in Asia, whether the ECA is government-owned institution or a privately owned one, deregulation may mean a more competitive environment, but it also means better quality services to Asian exporters. And the government owned agencies are recognizing that through partnerships with leading insurance groups, which give them access to databases, technology, services, and in some cases know how to better look after their own clients.

Q: Capital markets are constantly at the forefront of developing new tools for evaluating, managing and mitigating risks. Private insurance and credit derivatives for example are making inroads as credit enhancement tools. What are ECAs doing to counter such challenges in the market?

A:  We are looking to counter such challenges through innovation as well. Traditional credit insurance markets experienced very little change until the early 1990s. But since then we have a range of new innovations, which have enabled us to manage client's risk. So whilst other products like credit derivatives are an important development and, possibly, will gain more importance, we still feel that we have a more adapted product to manage trade credit risk today. That is not to say that the commercial markets would not come up with something that is just as suited to managing trade risk, but as an industry, we have become more innovative in the last few years.  

Q: Can you elaborate on any innovations?

A:  We have become more flexible in terms of the types of risk that we accept. Traditionally, we were looking at accepting the whole turnover of an exporter. Today, we can insure on excess of loss bases for example. This means that a multi-national company treasurer will be able to adjust the level of cover, which in turn provides him/her the ability to adapt risk management to his/her real needs.

Another innovation is our ability to provide the same product around the world. The Coface Group has a product called Globe Alliance, which uses the global network to offer a product that is of the same quality and standard regardless of geography, for example we will be able to offer the same conditions and terms used in the contracts in Hong Kong as in France. It is our "global and local" approach. The ability to manage risk in different ways in conjunction with the global local approach, are good innovations for us in recent years.

Q: Coface has demonstrated recently its commitment to expanding its operations into Greater China via Hong Kong. What opportunities has Coface identified here?

A:  Recently we have done two things in Hong Kong, one, we chose Hong Kong as the first place in Asia to launch our @rating service, and secondly we invested in a credit information agency here, which completes our InfoAlliance network in the Asian region.

In terms of greater China, we are developing partnerships in credit information and insurance.  Our preferred approach is to seek out fruitful partnerships wherever we can. We have strategic partners in China, including Hua Xia the credit information agency and we have very good cooperation and working relations with leading insurers with activities in credit insurance.

We have recently signed an agreement with Fubon in Taiwan to develop credit insurance there and we also have a partnership with China Credit Information Service Ltd, (CCIS) the leading provider of credit information in Taiwan. 

 We will launch @rating in mainland China and Taiwan towards the end of this year.

Q: What kind of market are you getting into with China? Do you see any barriers?

A:  The most obvious barrier is that China is a new market for us. We are hoping that local export companies would, in the light of the recent WTO agreement, want to put themselves on the same footing as their overseas competitors, and for example, trade on open account terms utilizing credit insurance. We think that Chinese companies are open to new techniques and ways of doing things. If we have the right strategic approach, and the right partnerships, we can bring our international networks, credit insurance and credit management techniques. I think that that would be a good start.


 

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