Crisis? What Crisis? Cash flow underwriting is a mug’s game

By Mark AttleyCover art copyright is believed to belong to A&M Records or graphic artists, Fabio Nicoli, Paul Wakefield, and Dick Ward.

I was bemoaning the return to soft credit insurance pricing the other day with some colleagues. The return to soft pricing follows very closely on the heels of supposedly the worst credit environment in living memory. The financial crisis resulted in ballooning claims ratios, severe contraction of credit and a justified increase in pricing. It should be noted that even with increases in pricing, premium rate costs were still well below late 1990 and early 2000 levels. However, those price hikes did stabilize the market and insurance company shareholders and re-insurers were appeased as underwriting results improved dramatically in late 2009.

Fast-forward to 2010 and it's playing like Supertramp's famous 1975 progressive rock album, Crisis? What Crisis?

In 2010, credit appetites improved, but then prices started dropping back. This would normally not be an issue if it were not for the fact that less than twelve months ago credit Armageddon was upon us.

My main concern is the apparent disconnect between what the majority of economists are forecasting and the overall direction underwriting decisions are going, and this is not just a North American phenomenon. My ICBA colleague in Spain (one of the so-called PIIG countries), Richard Pickers echoes the same sentiment. In a recent email he asks, “Why is the economic scenario different from the credit insurers’ point of view"?

In other words, insurer credit and pricing decisions seem to be swimming upstream – and brokers and insurance buyers should be concerned. No one wants a repeat of 2008/2009. Brokers are now in the position of having to eat slices of humble pie as they explain price reductions. I am not sure the industry’s reputation can withstand this latest turn. What the industry really needs is a return to sensible, properly priced coverage, where good accounts are rewarded and poor ones penalized.

One of ICBA’s U.S. blogging brethren is Rob Downey, from International Risk Consultants Inc. Inspired after being admonished by a colleague, in his recent post, “It is legal to be stupid, but it’s not mandatory”, Rob outlines some defensive maneuvers to protect clients from the folly of some underwriters’ ways. Being the eternal optimist, Rob alludes to an improving economy. (It must be an election year in the U.S.)

In contrast, my colleague from ICBA Canada, Millennium CreditRisk Management, Ron Doyle, writes relentlessly on the state of the global economy in his three most recent blog post "novellas": Contagion, Infection and Vaccines. Ron, along with others, warns that the economy and the credit insurance industry are not out of the woods yet.

The current drive for top-line results or “cash flow underwriting” can only be damaging to all stakeholders involved in credit insurance transactions. Furthermore, such an approach can only result in further instability in the market place and the deterioration of an already tarnished trade credit insurance industry image. It’s a mug’s game. One where there are usually only losers.

(Mark Attley is an ICBA Canada broker and co-founder and President of Millennium CreditRisk Management Limited – a credit and political risk insurance specialist – www.mcm.ca. ICBA is the world’s largest team of independently-owned, specialist trade credit insurance brokerages. Partners combine local service with global coordination to provide trade credit and political risk insurance solutions for multinational companies.)