Market

History and Development:

After the revolutionary introduction of money, which replaced the exchange of goods as payment, bank loans as well as trade credits became important elements within trade transactions. The significant role played by these forms of credit has increased tremendously since antiquity, and even since the Middle Ages. However, although it became apparent that loans could strengthen the economic prosperity of individuals or communities, the risk emerged that debtors could or would not pay the credit back. In short, the effort to address this risk of non-payment is as old as credit itself. The most commonly used forms of collateral, such as personal guarantees and liens on movable and immovable assets, were no longer suitable in the context of a rapidly expanding credit economy to fulfill their objectives on their own. Hence it was logical to use the modern instruments of insurance to cover the insolvency-related defaults of debtors, in return for charging a risk-related fee. The first practical experiments in the field of credit insurance led in the middle of the 19th century in France to spectacular initial success. However, like the first trade credit insurance-related activities in the US, England, Germany and Switzerland, these efforts failed.

The main reason was the missing differentiation between money loans and trade credits, as insurance and banking business was interfused. In addition, the insured companies did not have to insure their entire debtor portfolio. This fact naturally led to an adverse selection of risks at the expenses of the insurer. Beyond that, the premiums were often fixed arbitrarily, without a precise existing knowledge of the nature and extent of possible insolvencies and losses. There was also a general lack of knowledge and practical experience regarding crises in individual industries or national economies.

The first credit insurance company, which could effectively compete in the market, was founded in 1893 as American Credit Indemnity Co. of New York. European societies until 1900 merged or transferred their credit insurance sections to companies, which were founded later. A good example of this concentration process was the London Ocean Accident Insurance Co. Ltd., which established its credit insurance business in 1885, and transferred it to the Hanseatische See und Allgemeine Versicherungsgesellschaft in 1898. From there the business was moved to the Globus Versicherungs-AG in 1910, which finally merged the credit insurance division into the newly founded Hermes Kreditversicherungsbank AG in 1917: the foundation of today’s market leader Euler Hermes.

The consolidation and concentration process in the private credit insurance market has continued over the years and is still ongoing today. Credit insurance companies that recognized the changing environment within the industry could receive benefits by merging into large credit insurance groups and profiting from economies of scale. Many smaller credit insurers that did not enter large insurance groups or strategic alliances, could not compete effectively due to an inability to create cost efficient international networks or credit risk databases. Therefore, the development of the global credit insurance market resulted in the hegemony of only a few credit insurance groups, which dominate the international market. The remaining credit insurers have either been acquired by these global players, are fighting to maintain their market shares, or work as agents for large insurance groups.

In addition to the development of the private credit insurance market, the export credit agencies (ECAs) established through national governments are also the product of a long history. The first mover in this sector was the government of the United Kingdom, which founded the Export Credits Guarantee Department in 1919 with the intention of aiding national companies to expand their exports. The foundation of the first ECA was a milestone, and in the following years many other countries followed suit and founded similar institutions in order to support their national economies. Nowadays there are in excess of 60 ECAs established around the world, including most of the OECD countries.

In our time, the position of the ECAs is shifting as private credit insurers are more willing to offer credit insurance coverage for commercial and political risks in countries that were formerly within the domain of the ECAs. As a consequence, the private credit insurance market has already overtaken the ECAs with regard to the issuance of short-term policies, covering transactions with credit terms up to one year in almost every industrial country. According to a study of the credit insurer Coface, in 1999 over 95% of short-term policies were endorsed via private credit insurers. However, ECAs still maintain a dominant position in medium-term and long-term coverage, despite facing growing competition from the private market here as well. The impetus for this changing process was primarily provided by the agreement of the OECD governments in the 1990s to decrease subsidies by offering state-backed credit insurance coverage. In the past, ECAs had tried to subsidize exports by providing cheaper premium rates than other ECAs, with the intent of enabling national companies to achieve cost advantages. Today ECAs are obliged to work cost efficiently, charge risk-adequate premium rates and consider losses and operating costs in their pricing models. After the agreement reached by OECD governments, many countries started to privatize their ECAs. By way of example, in 1991 the ECA of the UK was sold to the private insurer NCM, which later merged into today’s global player Atradius. Finally, in 1997 the European Commission established guiding principles that restrict European Union (EU) ECAs to covering marketable risks domiciled in OECD countries. At the same time, private insurers in the EU were enabled to take any risks they were able to insure.

Nonetheless, the private credit insurance market, too, has faced tremendous challenges in the past, especially during the financial crisis in 2008/09 and Covid crisis in 2020, when most of credit insurers suffered a massive rise in (potential) claims, predominantly among whole turnover policies. The increased claims ratio, combined with growing pressure coming from the reinsurers, forced most of credit insurers to decrease their credit limit exposure, meaning the entire written and positively assessed credit limits. As a result of the reduction or withdrawal of credit limits, the credit insurance industry was heavily criticized for reacting in an exaggerated manner and being unable to differentiate between good and bad debtor risks (as reductions were put into effect on the entire credit limit portfolio). As a consequence, after the crisis, further credit insurers entered the market focusing on excess-of-loss policies, which enables the insured companies to assess their credit limits on their own, according their credit manuals.