Enhancing De-risking and Credit Enhancement Business in ICIEC Member States
The importance of credit and investment insurance cannot be overstated. For an industry that has been around for over a century, the challenge ahead is not to pay endless lip service to its business case but to enhance awareness and market education among policymakers, regulators, multilateral, national and private sector insurers and Export Credit Agencies (ECAs), banking institutions, insurance providers, exporters, importers, investors and SMEs. This is particularly so in a global geopolitical and economic environment of persistent and evolving risks, precipitated in recent years by the onset and ongoing impacts of the COVID-19 pandemic, the supply chain disruptions and burgeoning fuel and food price rises caused by the Ukraine conflict, the ensuing global economic downturn and cost-of-living crisis which has slowdown the post-pandemic recovery towards pre-pandemic normalisation. The biggest challenge, however, is how to instil the culture of credit and investment insurance among the 57 Organisation of Islamic Cooperation (OIC) member states with its disparate back stories of economies, financial resources, trade and investment architecture, de-risking and payment systems and development agendas. Is there a two-tier approach to trade and investment risk mitigation already entrenched? Mr. Oussama Kaissi, CEO of ICIEC, considers the options for OIC countries as they seek to build on their trade and FDI potential and attractiveness.
Today, around 90% of all global trade relies on some form of credit, insurance or guarantees issued by a bank, insurer or specialist financial institution. As it has done for over a century, the credit insurance industry will continue to evolve and adapt to meet challenges – societal, environmental and economic – that lie ahead and support the real economy.
Credit and investment insurance typically acts as a catalyst that provides financing to the real economy through export and import flows and promotes foreign direct investment (FDI) movements across the globe. By protecting exporters and banks against the risk of non-payment, defaults and expropriation, credit insurance enables cross-border trade and investment.
As the latest data suggests from The Berne Union (International Union of Credit and Investment Insurers), the not-for-profit professional association representing the global credit and political risk insurance industry, the industry demonstrated great resilience and adaptability throughout the pandemic, the crisis in Eastern Europe and the global economic downturn. Over the year 2022, the credit and investment industry supported US$2.83 trillion of cross-border trade and investment (up 5% on 2021) with an additional US$68.6 billion in non-cross-border support for exporters. Berne Union Members, which include ICIEC, collectively provide payment risk capital worth US$2.5 trillion each year, insuring approximately 13% of the value of total global cross-border trade.
A recent survey conducted for The Berne Union Export Credit Business Confidence Trends Index shows that the industry remains confident and positive, despite the high-risk environment and the global economic and geopolitical uncertainties. “Strong global trade performance in 2022 provides cause for optimism, but high inflation, widespread geopolitical risk and the increasing frequency of insolvencies/rising pre-claims means underwriters remain cautious through Q1 2023,” were the sentiments of an overwhelming number of respondents.
The Index tracks perceived demand, risk appetite and claims in the export credit insurance industry, based on quarterly surveys of Berne Union Members. To capitalize on business growth opportunities and increase resilience within key sectors, the survey recommends an approach based on five core features: ‘Adapt and Innovate’, Greater flexibility and support for finance across all stages of the trade cycle, More partnerships between public and private sources of finance and risk capacity, Reduction of barriers, Aligning of incentives, and Increasing coordination across different spheres.
Industry is Well Positioned
Respondents maintained that their industry is well positioned to support economic stability and energy security while also playing a pivotal role in advancing energy transition, food security and resilience, and climate adaptability goals.
Most industrialised countries, and many emerging economies, provide official support to cross-border trade and investment through ECAs. A number of global insurance companies have also introduced credit insurance products representing the private market. There are also four multilateral agencies that provide credit and political risk insurance, focused mainly on specific geographic regions. The latter category includes ICIEC, uniquely the only Shariah-compliant multilateral insurer in the world and a member of the Islamic Development Bank (IsDB) Group. The reality is that many OIC countries are bereft of a national ECA, a gap often unofficially filled by ICIEC by virtue of its de facto engagement with counterparties (usually ministries, state agencies, banks and export trade associations) and adoption by these partners.
Another reality is that of the 57 OIC and 49 ICIEC member states, only 15 are acceded to some sort of membership of the Berne Union, with the latest being the Export-Import Bank of Malaysia Berhad (EXIM Bank) which joined as an Observer Member and participant in the Berne Union’s Prague Club Committee. The 15 members include the Kuwait-based pan-Arab Dhaman (The Arab Investment & Export Credit Guarantee Corporation) and two members from Indonesia – Indonesia Eximbank and PT. Asuransi Asei Indonesia (Asuransi Asei).
Membership in a prestigious international professional body is essential or a panacea to the trade and FDI ambitions and shortcomings of several ICIEC member states. But the lack of participation in industry bodies such as the Berne Union, the Aman Union (the professional forum of Commercial and Non-commercial Risk Insurers & Reinsurers in OIC Member States and members of Dhaman and ICIEC), inevitably deprives partners involved in trade and investment activities in and with member states of getting the necessary exposure to the latest regulatory, legal, market, financial innovation and technical developments, trends, and processes pertaining to the industry. It also deprives them of engaging with potential partners, learning from the experiences of peer best-in-the-industry entities, exchanging ideas and forging partnerships for the future.
As risk absorbers and mitigators, the current status quo represents the credit and investment insurance industry in the OIC countries with both challenges and opportunities. Especially as the global economy is in a rebuilding and reimagining mode in the wake of the pandemic, as well as in pursuit of net zero goals for decarbonisation, and mitigating the impact of the supply chain disruptions caused by the Ukraine conflict, especially in fuel and foodstuffs, which has raised renewed questions about food security and building resilience to future shocks.
State of the Industry in Aman Union Member States
ECAs in AMAN Union member states have generally witnessed rising growth in their operations – both conventional and Shariah-compliant – largely linked to government COVID-19 mitigation emergency packages, the reality is that the culture of credit and political risk insurance (PRI) in many markets remains underdeveloped.
All stakeholders have a role to play to foster increased awareness of credit and PRI, including policymakers, multilateral and private insurers, reinsurers, private sector, businesses, SMEs and industry bodies such as our Union. The benefits and opportunities are implicit, especially in mobilising additional private capital for development from local banks and institutional investors. PRI and credit enhancement have a track record of effectively de-risking and thus catalyzing private investment into emerging markets through capital-efficient instruments.
Channelling investment into sustainable projects presents a sizeable growth opportunity for insurers, especially in infrastructure and development projects. Insurers can design products to reduce risks in infrastructure projects and increase their attraction to investors.
Turk Eximbank’s incisive Technical Performance Analysis 2020-2021 presented to the 13th Aman Union AGM in Dubai in May 2023 shows steady progress of the export credit and investment insurance ecosystem but from a relatively very low base.
The main findings are revealing:
i. Total capital base of Aman Union (AU) member entities was US$13.6 billion at end 2021 – up on the US$10 billion in 2020. Saudi EXIM accounted for 59 percent of the figure in 2021.
ii. Total number of policyholders in 2021 reached 8,493 – up 11 percent on 2020.
iii. Total number of buyers increased from 106,000 in 2020 to 116,000 in 2021, of which Turk Eximbank accounted for 51 percent.
iv. Total AU Business Insured in 2021 reached to US$49 billion – up 17 percent on 2020.
v. Top 5 members accounted for 83 percent of total AU Business Insured, led by Turk Eximbank at 48 percent and ICIEC at 20 percent.
vi. Total Short term Export business increased to US$35 billion in 2021 from US$28.6 billion in 2021.
vii. MT Business insured decreased sharply to US$200 million in 2021 from US$1.7 billion.
viii. Investment Business Insured increased from US$2.5 billion to US$3.1 billion in 2021 with ICIEC accounting for 71 percent.
ix. In 2021, total premium reached US$240 million, up 19 percent on the previous year.
The data reveals a very fragmented export credit and investment insurance ecosystem with a handful of players dominating, especially ICIEC, Turk Eximbank and Saudi EXIM, and the very low base for almost all the various indicators. It shows the huge gaps relative to the developed markets in the advanced economies and the work that needs to be done by member states and entities in almost all facets of the credit and investment insurance architecture, ranging from enabling legislation, regulatory and tax frameworks, risk mitigation strategies, product innovation, capitalisation, market depth, competition, awareness and market education.
In March 2023, ICIEC organized and hosted the 1st Capacity Building Program for the users of the OIC Business Intelligence Center (OBIC) in March 2023, stressing the Role of Credit Information Sharing, Business Intelligence, and Digital Transformation in supporting trade and investment decisions and how the OBIC platform can be used as an improved Credit Risk Management tool that will facilitate access to finance for trade and investment, as well as the mitigation of risks related to those activities.
Benefits and Challenges
The efficacy, benefits and challenges of credit insurance could not be better illustrated by ICIEC’s experience in Senegal. Over the past years, ICIEC has supported numerous landmark transactions and projects in Senegal with an investment totalling US$3.6 billion through risk mitigation, credit enhancement solutions and guarantees. Notable projects include Blaise Diagne International Airport (AIBD SA), Stade du Sénégal (Abdoulaye Wade Stadium), Dakar Expo Center, the Market of National Interest, Hann-Fann Wastewater Collector, and the Dakar Truck Station.
According to Madame Oulimata Sarr, Minister of Economy, Planning & Cooperation of Senegal, “The ICIEC guarantees (and de-risking tools) have enabled the realization of several infrastructure projects in Senegal. ICIEC’s credit and investment insurance products play a major role in project risk mitigation, as they make them more attractive to investors. In addition, these products make it possible to ensure projects are more bankable with foreign investors who have a high-risk perception when it comes to investing in Africa or in developing countries.”
However, several ICIEC developing member states are confronted with various dilemmas. Despite its vital importance in project financing, insurance, they point out, often contributes to the increase in the cost of a project, especially in Africa, which suffers from an unfavorable and biased credit rating. “As you well know, the pricing of insurance premiums is partly based on a country’s credit rating and as rating agencies overstate risk on the continent, African countries find themselves paying very high premiums,” noted Madame Sarr. As one of the most important development banks in the world, the IsDB Group, including ICIEC, could play a key role with rating agencies to change this perception of overvalued risk on the African continent. ICIEC, like other insurers, operate in the real world accountable to shareholders, market conditions, various risk metrics and its mandate.
Senegal’s call to insurers for a reduction in insurance premiums because “lower insurance premiums would help reduce project costs on the continent and make the market more accessible to African private sectors” merits consideration. But this is subject to collaboration, negotiation and demonstrable progress in enhancing the credit insurance culture and ecosystem in member states – an ambition to which ICIEC is committed to.
The benefits for ICIEC member states are potentially game-changing – increased intra-OIC trade and investment, better socio-economic outcomes, greater capacity building, and resilience in meeting climate, food security and other challenges, ensuring that no one, whether businesses, SMEs, or individuals, is left behind. A much greater level of partnerships is needed to close gaps in resources, and capital, which would allow the underwriting of much greater volumes of business and investment insured, reinsurance treaties and guarantees, capacity building, better risk management, and reliable credit history and data collection.
