Credit insurance is one of the few areas in Europe's property and casualty insurance and reinsurance sectors that is generating profit and growth and has a favourable business outlook. That's the view of analysts at Moody's Investors Service.

Russell Benzies, chief executive of Euler Trade Indemnity, UK subsidiary of Euler Group, agrees with that analysis. “Credit insurance has a most optimistic future, and there are wonderful opportunities around.”

And it isn't just about insurance any more, says Bridget Taxy, managing director of Coface LBF, part of the international Coface Group. “The whole thing is becoming wider. We have always offered collection services, for example, and there is good sense in extending that to other areas of account receivables management.”

That is one area in which she expects development. Another is an upsurge in internet use by suppliers and bankers. “There is an opportunity in electronic business, particularly through many-to-many channels. There is still a need, though, for sellers to know just who is sitting opposite them and this is where facilities like our @rating credit rating service come into their own.”

The @rating service provides up-to-the-minute credit ratings on more than 600,000 companies in almost 150 countries. Coface expects the @rating product to generate up to e400m (£240m) in additional annual revenue by 2003.

Supplying accurate information on which sellers can make credit decisions is an essential part of the credit insurers' business and is becoming an increasingly valuable income source.

“We have broadened away from just offering credit insurance,” says NCM spokesman Gary Hicks, “and we are moving to a new role as a receivables management company. Our ambition is to offer worldwide flexible solutions.”

What the credit insurers welcome wholeheartedly is the growing trend for companies to outsource their receivables management operations. As Benzies says, the ideal solution is “to have an expert on hand who can do all that for you”.

There is still room for significant growth in “conventional” credit insurance, and there is no let-up among the leading players as they battle for market share around the world.

“We are aiming for growth in areas that haven't used credit insurance much until now,” reports Hicks. “For example, we have recently moved into Canada, and Japan is also a prime growth target for us.”

Benzies says that Euler is co-operating closely with fellow Allianz subsidiary Hermes Kredit and the New Year will see a determined effort around the world.

“Euler & Hermes International will launch officially in the New Year, focusing on larger and multi-national clients, and in other territories around the world there will be a concentration on whichever company is best placed to operate well in each country.

“For instance, Hermes in the UK will wind down its operations and Euler Trade Indemnity will pick them up.”

Globally, Euler is deriving increasing revenue from factoring and this area of activity is attracting attention from other insurers. For instance, NCM has recently bought Dutch factoring company Forenede Factors and expects to develop that business worldwide.


Sources of revenue

Another area from which the major credit insurers draw worthwhile non-risk fee revenues is their involvement in government export credit insurance schemes. In France, former government-owned Coface administers government political and export risk insurance on a fee basis, while NCM supports government schemes in the UK (where it developed from a state-owned exports credit department) and the Netherlands. For those two insurers, that fee income represents around 10% of their total revenues.

Moody's analysts do not expect the market to attract any significant new players, arguing that newcomers would face daunting obstacles.

“It takes time to develop a stable network to provide all the services that constitute credit insurance,” the report's authors say, highlighting the need for insurers to have extensive databases – “to know the buyers who represent the risks” – and experienced personnel using well-founded distribution channels and systems.

In the analysts' judgment, there is no danger of an oversupply being created and margins being depressed, even though credit insurers continue to make attractive returns. The high degree of concentration in this sector – in which the companies of six European insurance groups write more than 80% of the business – is a considerable obstacle to new entrants.

A further deterrent is the generally low penetration of demand for credit insurance services. “These are lines of insurance that will not be voluntarily bought by most companies but that need to be sold,” says Moody's. “Only a fraction of all companies in the market buys protection for its trade receivables and penetration is a fraction of 1% of GDP in most countries.”

Against that though, the volume of business insured has grown substantially in the past few years and there are many signs that this expansion will continue. Emerging markets offer excellent opportunities, say the credit insurers, and the acceptance of credit insurance as a routine cost of doing business in such huge economies as China, Japan and India would treble or quadruple worldwide revenues.

Private trade credit insurance premiums are currently estimated at around US$4.5bn (£3.1bn); of that, some 85% is written in Europe. Swiss Re calculates that annual premium growth in Europe has averaged about 5% over the past ten years.

Over the next five years, Swiss Re forecasts that the European market for credit insurance will grow by between 5% and 7% a year, as export growth accelerates, while the North American market is expected to grow in premium terms by about 10% a year.

Consolidation over the past decade has increased the market share of the leading six players to more than 80%, but competitive pressures are increasing. The credit insurers are being forced to enter new markets and to provide new products and standalone services.

With the right combination of insurance products, information provision and outsourced receivables management, there is every reason to expect the credit insurers to continue to prosper.

There are, however, strong undercurrents acting against them – the market continues to soften in pricing terms, and more sellers are deciding to carry non-payment risks themselves – and the sale of receivables through factoring and securitisation takes the credit insurer out of the loop altogether.

What is clear from the analyses undertaken by Moody's and others, reported by Swiss Re and the insurance companies themselves, is that there is a huge market for credit insurance – if the barriers and obstacles mentioned can be overcome.

Equally, the leading players in the credit insurance market are in strong positions from which they are unlikely to be dislodged. As Moody's comments: “Although small compared to other financial institutions, and even among insurers, credit insurers have reported more attractive returns and [show] comparatively higher levels of capital and reinsurance back-up than most non-life insurers, and are in some cases owned by even stronger financial organisations.”