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The Credit and Surety Insurance Market |
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Trade credit insurance provides cover to the sellers of goods or
services in the event the buyer fails to fulfill his obligations.
Surety insurance guarantees the fulfillment of a contract even if
the contractor fails to perform.
Although these products provide protection against credit risk,
they fundamentally differ from a bank loan or a bond by the fact
that no money is lent. In case of trade credit, they only cover
the payment obligations of a buyer of goods and/or services to the
benefit of his supplier. In the case of surety, a cover is provided
to a beneficiary on the failure of an obligor to take some kind
of contractually agreed action (such as performing a construction
work or paying taxes when due, or legal obligations).
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The Credit & Surety PML Working Group |
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The main credit insurers and reinsurers formally formed the Working
Group in Munich in March 2004. It is the successor of a group formed
within the Credit Committee of the Pan American Surety Association
in July 2002.
Motivation
The initiators felt the need to find a good method to evaluate the
probable maximum loss (PML) of credit insurers, and more generally,
to improve the assessment of the capital needed to cover the portfolio
risk of credit and surety insurance risks. The group quickly realized
that the parameter of interest for evaluating the capital at risk
was the Loss Given Default (LGD).
Between July 2002 and March 2004, the group has been able to bring
together the majority of the credit and surety insurers and reinsurers
to come up with common definitions of terms, to
design a study which realistically represents the process of trade
credit insurance, and, last but not least, to obtain the first encouraging
results for the percentage of LGD in the industry.
In 2008 the group published a report on the Loss Given Default for credit insurance, covering the results of a three-year observation period. Currently this study is extended to also cover the years of the credit crisis.
Since 2008, the group is also conducting a study on the LGD for surety business; final results are expected for early 2011.
Aim of the Working Group
The C&S PML Working Group aims at completing the research on the LGD for trade credit insurance and at moving to a similar study for the surety business. It is currently sponsored by over 20 companies and professional associations. These sponsors fund the pre-competitive research jointly done by the Swiss Federal Institute of Technology in Zurich (ETH) and the Versicherungsforen Leipzig and provide the data underlying the study.
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The Goals |
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Credit and surety insurance is a niche market and as such it does
not enjoy a general business understanding by outsiders. On the
other hand, it does play a very important role in helping companies
manage their credit risks. By providing pre-competitive research
on the actual industry risks, this understanding gap can be filled.
Research and enhanced dialogue
The main goal of the working group is to foster quantitative research
on the industry risks and encourage the dialogue with other stakeholders
(e.g. regulators and rating agencies) regarding the best ways to
assess those risks and allocate capital to them. By introducing
transparency in the terms, methods and results of the study, we
want to build a common understanding and a fair pricing of the products
offered by credit and surety insurers.
Furthermore, the Working Group also provides a platform for the
different professional associations to collaborate
on technical matters concerning the quantitative evaluation of the
risks of the industry.
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The Means |
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Lean organization
The Working Group seeks to keep its organization to a minimum, while
maintaining the interaction and the efficiency at a maximum. It
meets twice a year at the location of one of the members, who acts
as host and chairman of the session. In the interim, members are
responsible for various objectives and report to the Steering
Committee, which, in turn, insures the follow-up of the different
projects.
Independent third party for the study
The Seminar for Statistics of the ETH and Versicherungsforen Leipzig are in charge of building the database of loss data, conducting the necessary statistical studies and hosting this website. They will also publish the results of the study and provide advice on the best way to collect the data, whereby full anonymity is guaranteed. |
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