One risk management option is export credit and political risk insurance, and exporters, importers and the banks that finance them, in the developing countries are now increasingly discovering these products. However, the export credit and investment insurance culture in the 56 member countries of the Organization of the Islamic Conference (OIC), has traditionally been at best under-developed although there are signs that this has started to change. The prime mover behind this industry in the OIC countries is the Jeddah-based Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), a standalone member of the IDB Group. Here Dr. Abdel Rahman Taha, CEO of ICIEC, who has been at the helm of the organization since its establishment 16 years ago, discusses with Arab News, the credit and political risk challenge for the IDB member countries; why this industry has assumed an even greater importance in a post-financial crisis era; the latest developments at ICIEC and the IDB Group; and the potential for credit and political risk insurance going forward.
What sort of year has 2009 been for ICIEC?
2009 did a lot of damage to the credit and political risk investor. The big three — EuroHermes, Coface, and Traders were badly affected and sustained huge losses.
We paid about $1.6 million in claims which is a minor part of our business, but we recovered some of the money. At the time when the loss ratio (the percentage of premium income used to pay claims) for the industry was over 80 percent, ICIEC’s loss ratio was only 15 percent.
ICIEC’s volume of insured business in 2009 was reduced substantially by 29 percent. The actual implementation of credit limits we approved (declared shipments or implemented projects) declined from $1.4 billion in 2008 to $1.03 billion in 2009. However, the new approvals increased from $1.7 billion to $2.1 billion for the same period, thus suggesting that our customers had the intention to do new business and applied for credit limits which we approved.
In your medium term business is there a bias towards certain countries not because of design but because of market conditions and strengths?
Normally short term business accounts for 75 percent of our business. But in 2009, medium term business increased substantially to account for 40 percent of our total underwriting business. It is a demand-driven business. The biggest demand for project business and long term investment insurance is in countries like Sudan. We are also supporting a new breed of companies from our member countries which I call ‘Third World Multinationals’ such as SABIC, Saudi Aramco, Etisalat, Orascom, and others such as the Egyptian Suweidi Electric Group.
ICIEC contributed to Suweidi and others’ transformation into a multinational company because by using our political and investment risk insurance they were able to enter countries and markets which otherwise they would not have been able to do business in and therefore enabling them to investment and trade in countries which otherwise are perceived as high risk countries.
Is there a greater awareness of the need for export credit and investment insurance in your member countries?
Yes it has improved, but awareness and utilisation of these products are still very low. One of the unintended benefits of the financial crisis is raising the awareness of risk and how to manage the risk. A good way of managing risk is through export credit insurance. In 2008, the fifty major ECAs of the world who are members of the Berne Union did $1.3 trillion of export credit and political risk insurance. In contrast, in our member countries – the 56 member states of the Organisation of Islamic Conference (OIC), have only about twenty ECAs. All of us — ICIEC, Turkish Eximbank, MECIB in Malaysia and the members of Aman Union (the union of Arab and Muslim ECAS) — together we have only $14 billion of export credit and political risk insurance.
So is this heightened awareness reflected in your figures for First Quarter 2010?
The new commitments for the first quarter 2010 compared with the same period in 2009 have increased by 50 percent from $474 million to $710 million. The actual business insured increased by 77 percent from $228 million to $403 million. Previously we had a lot of trouble convincing banks in our member countries to accept our policies as security and collateral for their credit. Now the banks are starting to come on board because they are realizing that export credit and political risk insurance works, and it does enable them to expand their business, This process was also helped by the fact that ICIEC was rated last year AA3 by Moody’s Investors Service, which was re-affirmed in November after the impact of the crisis.
With this increased volume of business, are you planning an increase in your capital to support your new underwriting?
That is a very good question, because if the business continues expanding at this rate we are predicting that by the end of 2010 we are going to exhaust our capacity. Our subscribed capital is $250 million. This gave us a capacity of about $2 billion. We also use reinsurance so on average we cede about 40 percent to the international reinsurance industry especially to Lloyds and others.
You have to strike a balance between the money you cede and the risk-sharing you gain. Up to now we feel that the 40 percent ceding of our income is the right balance and we do not want to increase this, because if we do we just become a market agent for the reinsurers.
In addition to the increased results for the First Quarter 2010 we have a huge pipeline of new business. The size of some of the projects is amazing. They have increased from $20 million a few years ago to projects of more than $300 million.
We are working on some new products such as launching a Letters of Credit (LC) Insurance Fund and a Sukuk Guarantee Fund. Sukuk by its very nature cannot be guaranteed by the issuers, but can be guaranteed by a third party. This puts ICIEC in an ideal position to be able to provide political and credit enhancement risk insurance.
We have estimated that once the market returns to normality, Sukuk issuance will top $30 billion. If we assume that a third would actually go to the market we are talking about $10 billion of issuances. Even if you leverage your insurance fund 10 times, you need at least a $1 billion fund.
Takaful policies are effectively receivables especially since the LCs are related to trade. Is it possible to securitize these Takaful policies?
Yes, theoretically it is possible to do so. In the last 10 years we have underwritten over $10 billion of insurance business. Of this we have facilitated $8 billion of trade finance backed by our insurance. We paid $24m million of claims. We recovered half of that. The unrecovered claims are only $12 million, which is nothing when you compare it with $8b billion The trick is to have the capability to manage the risk.
Do you foresee a bigger connect between ICIEC and the rest of the IDB Group?
The IDB Group has been undergoing a reform process which is aimed at developing the IDB into a world-class institution. One of the elements of this process is to develop synergies between the various parts of the Group. In 2009, a task force was formed at the IDB, which I chair.
The mandate of this task force is to promote synergies between the Group entities. We are now implementing the proposals in this respect especially between ICIEC, Islamic Trade Finance Corporation (ITFC) and Islamic Corporation for the Development of the Private Sector (ICD).
We are also embarking on a Member Country Partnership Strategy (MCPS) within the Group where the IDB engages with a member country and discusses at the very highest level what the IDB strategy would be to help that country. We also cooperate closely with ITFC because ITFC increasingly is financing ‘clean financing’ which is without bank guarantees. For unsecured business you need some sort of security and credit insurance is an obvious option. We have issued a specially-designed insurance policy for the ITFC which is already in use.
With the ICD again they never develop a project by themselves. They always work with some private sector partner. In certain countries, these partners may require credit risk insurance.
How many member countries have acceded to ICIEC membership?
We have 39 member countries. The latest country is Albania, which becomes the first European country to join ICIEC. All the Arab countries except Iraq are members.
You have also liberalized your underwriting regime.
The way it was envisaged in the IDB Articles of Memorandum was to insure intra-trade between member states, which is very little. For insurance business this pool is very small. Whether a member country exports to another member country or to the US, the economic benefit is the same. Some of the changes also enabled us to insure the political risk of investment coming into our member countries irrespective of their source.
We are also keen to insure imports from member countries to member countries of strategic goods machine tools, development of infrastructure, for food security of the country etc.
We are also looking to insure part of the domestic sales of our policy holders such as Saudi Basic Industries Corporation (SABIC), which is one of our customers. Currently we only insure the exports of SABIC for sales outside Saudi Arabia. SABIC also sells in the Kingdom on credit. My customer would ideally like to cover his entire portfolio.
