At the 2024 Trade Finance Investor Day conference in London, Deepesh Patel, Editorial Director at Trade Finance Global (TFG), sat down with Richard Wulff, Executive Director of the International Credit Insurance and Surety Association (ICISA) and TFG Editorial Board Member.

In trade, no process is more talked about and less acted upon than digitalisation. Digital solutions have been rolled out in sectors far and wide; even street vendors are accepting contactless payment. In a sector as fast-moving and malleable as trade, it’s hard to pin down exactly why digital uptakes have been so slow.

Perhaps the reluctance to digitalise trade comes from the high start-up cost required, both financially and in terms of the effort required to retrain personnel and migrate systems. Perhaps it’s negative attitudes towards legislation, which, though in place to facilitate the process, are cumbersome in the immediate term. Perhaps it comes from scepticism about data security and leaks. Or perhaps organisations have committed the phrase ‘if it ain’t broke, don’t fix it’ to gospel.

Whatever the reason, it appears we could use the reminder: trade digitalisation needs to happen now. Wulff made it simple by providing four reasons why trade digitalisation has become imperative. 

1. Supply chain transparency for compliance 

The conflict in Ukraine has led to a surge in sanctions and export control measures: as of September 2024, over 2,200 entities and individuals are subject to EU sanctions against Russia. The geopolitical aim is to deprive Russia of critical technologies and markets to weaken its economic base, curtailing war-waging capabilities. As banks grapple with this complexity, supply chain visibility is a top priority. 

“Trade digitalisation helps to make the supply chain transparent,” Wulff said. “So I can know, where did the goods come from? Where are they going? And is that in breach of sanctions or export controls?”

As major banks seek to minimise risk exposure, they’ve increasingly ‘derisked’ by withdrawing services from entire regions perceived as high-risk. This has come to the detriment of smaller economies that benefit greatly from corresponding banking relationships.

In trade credit insurance, a challenge is to allow institutions to manage rather than avoid risk, ensuring smaller economies are best supported and integrated into the global economy. Data is a guiding torch for this. 

“If you have to jump over a ditch and you do that in the dark, you don’t know exactly how broad the ditch is. You take a really big jump to make sure that you don’t fall in,” explained Wulff. 

“If it’s bright, you can see how where all the ditch is and you can be more precise. That’s exactly what’s happening here. The more data you have, the more light there is, and the more sure you are that you are going to jump over the ditch.” The more information and data an insurer is provided with, the more accurately they can price and underwrite risk. 

2. ESG monitoring and measurement 

Of course, document digitalisation saves paper and postage costs. But the environmental, social, and governance (ESG) impact of trade digitalisation comes primarily from enhanced tracking, which digital solutions can provide.

Within short-term trade credit insurance, with goods traded all day every day, the environmental impact is not as clearly accounted. But this information is vital to make informed business decisions: if parties can better track the flow of goods and materials, they reduce the risk of inadvertently breaching regulations.

Wulff used lignite as an example of the most polluting type of coal. Containing large amounts of dirt and/or water, it emits 1250kg of carbon dioxide equivalent (CO2-e) per megawatt-hour sent out, far more than black coal or natural gas counterparts (1000kg and 550kg, respectively). In spite of this, the lignite market is expected to grow rapidly to $182.21 billion by 2028, at a compound annual growth rate (CAGR) of 5.2%.

If the impact of this commodity were more clearly measured, companies would likely steer away from it. In essence, Wulff said, businesses should ask themselves: “Do you really want to deliver your spare parts or your commodities to a polluting industry?” 

This is one element with significant scope for improvement, as vast amounts of data are required to measure it. “We cannot yet say if you trade these eggs from, let’s say, Thailand to Europe, what does that do to the environment? What does the shipping do? What does the handling do? And what does the further processing do? That’s what we need the data for, and we’re in desperate need of that,” he said.

Digitalisation can help fill these data voids, enabling businesses and financiers to make more informed decisions about the sustainability of their trade activities. An example is the growing popularity of ‘New IT’, or the increased weighting of ESG compliance when selecting IT vendors, which includes consideration of edge computing architecture. Edge computing allows devices in remote locations to process data close to where it’s generated, at the ‘edge’ of the network, reducing overreliance on centralised cloud systems and allowing for quicker, more accurate data distribution. In an era where 91% of companies fail to comprehensively measure their CO2-e emissions, the need for accurate data monitoring is growing more desperate in order to meet international sustainable development goals (SDGs): and digitalisation presents a solution.

3. Combating fraud 

Fraud poses another major threat. “It is much more than [balance sheet fraud],” Wulff warned. “It’s fake documents; it’s collusion between buyer and seller.”

According to Wulff, digital standards and registries for trade documents are crucial weapons in this fight. “Take the bill of lading, during the COVID-19 pandemic, when international movement was severely restricted, as an example.” These critical shipping documents were simply being photocopied on standard home office equipment and then negotiated at banks. “It was the purest type of fraud: parallel trade, where goods were sold multiple times.”

The scale of financial fraud is significant. Headline cases with billions of dollars in losses this year highlight costly fraud and misconduct issues at global businesses. Financial fraud’s illicit nature makes it difficult to quantify, but MonetaGo has highlighted how over $10 billion in trade finance losses have been publicly identified since 2020: a small fraction of the total cost of fraud. 

Digitalisation can strengthen trade record integrity through various mechanisms: for instance, distributed registry systems that create tamper-resistant documentation; or Legal Entity Identifiers (LEI) that provide unique, verifiable identification of trading partners. These digital solutions enable real-time verification, automated consistency checks, and immutable audit trails, significantly reducing the risk of document forgery and manipulation.

While trade finance is already classified as a low-default and low-risk asset class, this position is by no means set in stone. Fraudsters evolve at pace with the industry, so it’s essential to act proactively rather than reactionarily.

4. Unlocking new trade finance products 

Improved data and transparency through digitalisation are also enabling the development of innovative trade finance solutions, particularly for underserved markets. Without data, insurers remain unwilling to cover riskier regions; without digitalisation, data will remain trapped.

“What a number of parties are doing now is to create that data,” Wulff said. “People can come in and say, ‘This is actually a risk that is worth taking, and we want this.’”

Helping draw finance to underserved economies doesn’t just assuage the trade finance gap: it has the potential to ‘end poverty in all its forms’, the most urgent of the global sustainable development goals (SDGs).

However, these benefits can only be unlocked when global standards are harmonised, and domestic legal systems must recognise electronic transferable records (ETRs). The UNCITRAL’s 2017 Model Law on Electronic Records (MLETR) marked a promising step in this direction, creating an enabling environment for electronic trade. Its international dissemination has been slow but sure.

“I would like to see at least the entire European Union and the US follow the examples of France, the UK, Singapore, and a number of African countries so that we can start getting down to business without those frictions,” Wulff said.

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This year, challenges thrown at the trade, trade finance, and credit insurance industries have made clear that compliance, sustainability, fraud prevention, and financial inclusion must urgently be improved. Luckily, digitalisation takes a giant leap towards this end. “The more precision there is, the better it is for the sellers, the better it is for the clients,” Wulff summarised. 

This must be a united effort between businesses and regulators, out of commitment to closing global data gaps and aligning on common standards. Organisations must invest in these digital capabilities now, or find themselves drowning as others surf the internet wave.

The post VIDEO | C-suite speaks | ICISA’s Richard Wulff provides four reasons to digitalise trade appeared first on Trade Finance Global.

The International Credit Insurance & Surety Association (ICISA) has released its 2023 industry results, highlighting key trends and developments in the trade credit insurance and surety bond markets. 

ICISA represents 95% of the world’s private credit insurance business, with nearly €3.2 trillion in trade receivables insured and billions in infrastructure guaranteed.

Trade Finance Global dives into the report’s findings and features insights, speaking exclusively to Richard Wulff, Executive Director of ICISA.

ICISA plays a crucial role in supporting global trade and economic development. 

By bringing together the world’s leading credit insurance and surety companies, ICISA ensures the protection of trade receivables and guarantees construction and service projects globally.

The association serves as a safe harbour for trade and investment, providing security and stability amid economic uncertainties.

Key findings from the 2023 industry results

The 2023 industry results reveal several important trends:

• Surety Highlights:
  • Insured exposure increased by 7.7%, reaching €1.4 trillion.
  • Premiums written rose by 8.9% to €6.9 billion.
  • Claims paid surged by 68.5%, totalling €2 billion.
  • The rise in premiums written reflects increased demand for surety bonds, which provide guarantees for the completion of construction and infrastructure projects. The growth in insured exposure indicates a broader market acceptance and reliance on surety products to mitigate risks in these sectors​​​ (ICISA)​.

• Trade Credit Insurance Highlights:
  • Insured exposure grew by 4.5%, totalling €3.2 trillion.
  • Premiums written increased by 5%, amounting to €8.2 billion.
  • Claims paid rose by 11.4%, reaching €3.2 billion.
  • The increase in trade credit insurance exposure and premiums highlights the critical role of these products in protecting businesses from the risk of non-payment, ensuring liquidity and financial stability​ (ICISA)​.

Surety bonds play a critical role in guaranteeing project completion and protecting against contractor default. 

The increase in surety claims paid, which surged by 68.5% to €2 billion, highlights the difficult economic conditions contractors and other principals face today. Equally, it highlights the value that sureties provide to the economy by mitigating losses when defaults occur. 

Similarly, the trade credit insurance sector has seen substantial growth reflecting the demand from businesses for protection in uncertain times. 

Trade credit insurance protects businesses from the risk of buyer non-payment, ensuring that suppliers receive payment even if the buyer defaults. 

This insurance is crucial for maintaining cash flow and allowing businesses to extend more favourable credit terms to their customers. 

Increases in both insured exposure and claims for both TCI and surety markets clearly demonstrate the challenging economic environment we face where defaults are more frequent. Strongly capitalised and stable TCI and surety markets are essential for economic resilience in such periods​ (ICISA)​.

Impact of macroeconomic factors

The global economic landscape, marked by high interest rates, rising costs, the energy transition, and geopolitical tensions, has significantly influenced the trade credit insurance market in 2023.

Wulff said, “There is no doubt that the risk awareness of clients has increased. The risk of insolvency has increased notably over the past couple of years, leading to a steep increase in business failures within the OECD area. This has many causes such as interest rate increases and supply chain disruptions due to political events (exports from Ukraine, the Israel-Hamas conflict impacting Red Sea routes etc.). This has put the spotlight on our industry and the professionalism in underwriting risk for the benefit of its clients.”

Technological innovations in trade credit insurance

The rise of ‘Insurtech’, including AI and digital platforms, has transformed the trade credit insurance sector by improving risk assessment and operational efficiency.

Wulff said, “We see the impact on both the product/distribution side as well as for internal processes. Initiatives of insuring business transacted on B2B platforms fit into the first category. Integrating AI into underwriting and claims processes fits into the second. The sector will continue to develop in line with the availability of new technologies to optimize cover and speed to serve customers in the best possible way.”

Environmental and Social Governance (ESG) initiatives

ICISA members are increasingly integrating ESG principles into their operations, reflecting a growing awareness of sustainability in financial services.

Wulff said, “Sustainability principles are incorporated and deeply rooted into our members’ business. From underwriting guidelines (which sectors to promote, which to avoid) to investment practices. And it is not simply a matter of environmental impact. ICISA members are conscious of the need to monitor human rights, governance and social issues within the value chain they are involved in.

It is not to be underestimated that acting responsibly also has an impact on the attractiveness of our sector to new talent. Especially younger employees of our members demand action from their employers to act responsibly and improve our society. These employees are vital to our members as they possess current skill sets that are necessary to continue to innovate.”

Challenges in the surety market

The surety market faces challenges such as regulatory hurdles and market demand fluctuations. ICISA members are actively addressing these issues to maintain market stability.

On the current challenges facing the surety market, Wulff said, “The inflationary pressures that we have seen have had a major impact on the expense base of contractors, a major cohort of clients of our surety members. This has impacted the prices of building materials as well as wages and labour availability generally.

“This has weakened many contractors’ balance sheets, making them more vulnerable to negative situations where they can no longer fulfil bonded contracts. Our members have worked tirelessly to find solutions that are palatable for the beneficiary of the bond (who wants the contracted work done). On a longer-term horizon, and especially in Europe, a multitude of regulatory, political and economic factors limit opportunities to start new construction projects. This is to the detriment of the construction sector as well as to the public at large, for instance for people looking for an affordable place to live.”

Future outlook for trade credit insurance

Looking ahead, the trade credit insurance market is poised for growth, driven by emerging markets and technological advancements. However, potential risks remain, requiring continuous innovation and adaptation.

Wulff said, “We are very optimistic for the future. Our members have shown themselves to be resilient and to be able to serve their clients in a fast-changing environment. Risks will remain and pop up from time-to-time, but this is what we do best. This is our reason for existence – to mitigate risk and to help clients rebuild after loss events.”

Women in Trade Credit Insurance

ICISA has launched the Women’s Surety Network and the Women in Credit Insurance initiatives, reflecting a commitment to diversity and inclusion in the industry. 

These programmes aim to support and promote women in the field, fostering a more inclusive industry environment.

How will industry initiatives actually impact gender diversity? Wulff said, “Attracting and retaining talent to our industry is vital for its development and the ability to deliver maximum value to customers and shareholders alike. Uniformity in talent leads to suboptimal outcomes. Gender diversity initiatives like WICI and WSN address part of this. We see our members hiring diverse talent, and these initiatives support them.”

ICISA welcomed three new members: Export-Import Bank of Thailand, Interamerican, and RenaissanceRe. 

These additions strengthen ICISA’s network and enhance its capacity to support global trade and investment:

• Export-Import Bank of Thailand: Plays a key role in driving Thailand’s trade and investment strategies.
• Interamerican: A leading insurance company in Greece, enriching our network with experience of Greek and neighbouring surety markets.
• RenaissanceRe: Based in Bermuda, adds to the expertise within ICISA with an innovative focus on risk management and financial solutions​ (ICISA)​​ (ICISA)​.

Supporting the global economy

Despite economic challenges, ICISA members continue to provide essential support to the global economy. 

The increase in trade credit insurance exposure and surety claims paid reflects the industry’s resilience and its critical role in mitigating risks, ensuring liquidity, and fostering economic stability.

The 2023 ICISA industry results underscore the pivotal role of credit insurance and surety bonds in facilitating global trade. 

As the industry navigates economic challenges and embraces technological innovations, ICISA members remain committed to supporting economic development worldwide.

The post Deep dive: ICISA’s 2023 industry results explained appeared first on Trade Finance Global.

Despite the attention brought to the trade finance gap in recent years, it still continues to grow. A recent Asian Development Bank (ADB) report shows that the gap has now widened to $2.5 trillion. 

Despite best efforts, the status quo is clearly not addressing the gaps sufficiently. The wider industry needs to come up with new and creative solutions in response. No one option will succeed by itself, but it is becoming increasingly clear that trade credit insurance has an important role to play in helping to close the gap further.

In the report, ADB rightly mentions that the lack of availability of (sufficient) collateral is a cause of rejection of trade finance applications. Figure 2 shows that in 28% of cases, insufficient collateral plays a role – whether directly or as a result of the risk perception of the financial institution in question. A further 9% of rejections are caused by cost/capital considerations.

The question remains, how does trade credit insurance help in three vital topics: collateral, risk appetite, and cost?

1. Collateral

Credit insurance helps narrow the trade finance gap by providing security (the policy) based on its unrivalled ability to mitigate risk. ICISA’s trade credit (re)insurance members hold credit ratings of at least A- (S&P or equivalent). This credit rating takes the place of that of the buyers when a covered financial institution finances invoices.

Banks are not equipped to assess large numbers of (sometimes very small) risks. On the other hand, this is the credit insurance community’s core competency. Insurers are aided by large internal databases of information (supplemented with third-party information) on diverse buyers. Underwriting processes are flexible and efficient incorporating automated, semi-automated and (as an exception) manual processes to make decisions.

2. Risk appetite

Unfamiliarity with risks tends to lead to higher pricing. Credit insurance companies are familiar with the great majority of risks (whether corporate or country risk). This allows them to price more accurately and show a higher acceptance rate than a local/national bank. 

It stands to reason that a Malaysian bank is less familiar with Colombian corporates and/or country risk than an internationally active credit insurance company with a presence in Malaysia as well as Colombia. This familiarity also enables the credit insurers to have a greater appetite for risks. 

Cover may therefore be easier to find from trade credit insurance markets than financial institutions with less experience of these markets and risks. 

Familiarity with, and confidence in the credit insurance policy as collateral is another important form of risk appetite. This form of collateral is ubiquitous in the OECD area and becoming ever more common in Latin America, Southern Africa and parts of Asia. 

The credit insurance community has become active in spreading the word in parts of the (developing) world, where trade credit insurance is not as well. 

You may note that in our upcoming Trade Credit Insurance week (online in the week of 2 October), there are items on the development of the product in Sub-Saharan Africa, and one on the further development of trade credit insurance in Asia, reflecting the demand for more information about – and in – these markets

3. Cost

The high-investment grade nature of the insurers has a beneficial effect for the banks’ cost of capital, as well as the resulting price to be paid by the financed entity, thus narrowing the trade gap.

Notable reforms

ICISA is a supporter of the Digital Standards Initiative of the International Chamber of Commerce (https://www.dsi.iccwbo.org/) through membership in the Industry Advisory Board. We firmly believe that setting international standards for digital/paperless trade will have a beneficial effect on trade volumes as well as transparency of the entire process. 

Apart from lowering the cost of trade, digitalisation reduces many of the barriers to entry that SMEs and startups in developing countries face. Importantly, it also enhances options for financial crime prevention, including more reliable information as part of Know Your Customer and other compliance procedures.

Related to this, a key concern for many across the industry in addressing financing gaps is the reliability of the rule of law across the world. It is important that key institutions, such as courts, are reliable, predictable and free from corruption. 

This is not a simple issue to fix, but if we are serious about addressing the trade finance gap it is one of the most important, along with the availability and reliability of business information. 

Identifying and supporting civil society organisations across the world which are working on this topic may be a good starting point.

Top challenges

I support ADB’s list of recommendations and would like to expand on the first and most important one: the creation of additional capacity.

Firstly, giving appropriate recognition to trade credit insurance as a credit risk mitigation tool (providing collateral) would help to broaden awareness of the product and its benefits. This additional risk mitigation mechanism has been proven to increase the financing capacity in multiple jurisdictions.

Secondly, it must be acknowledged that distribution mechanisms in countries needing the most economic development are poor. Even when banks are present in communities outside of the capital and major trading localities, they often lack the financial insight necessary to market and assess much-needed financing. 

Rejection of a facility based on poor presentation of the credit application should be a call to action to educate the distribution network and applicants. This will ensure that applications are presented in a way which addresses the key questions any financier will have and can then form an opinion of. 

Finally, focusing on banks only solves part of the issue. And this cannot be a one-size-fits-all solution, given the complexity of global trade. In particular, I believe more attention should be paid to the factoring community and the positive impact they can (and already do) have. Factors are traditionally better equipped to serve smaller, less sophisticated clients. 

The post 3 trade credit insurance considerations for the rising $2.5tn trade finance gap appeared first on Trade Finance Global.