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A Credit to Dublin
International credit reinsurance written from Ireland has a bright future. Eugene O'Keane and Eddy Van Cutsem report.
The changes in the financial landscape between 1987, the year in which the legislation in Ireland with regard to the extension of the fiscal incentives to the international financial sector was passed, and today could not be greater. The International Financial Services Centre (IFSC) was only a vague concept, and reinsurance in Ireland was non-existent.
The latest available data for the year 2003 show the importance of the international insurance and reinsurance industry in Ireland with written premium of around 12 billion Euro, shareholder funds of around 10 billion Euro, a contribution to the public finances of 118 million Euro in corporation tax and employment of over 700 highly qualified staff.
Today, the sector includes all the main players in the reinsurance arena.
The international insurance and reinsurance classes of risk which are being transacted in Ireland have developed significantly over the years. While initially few and mainly traditional classes were written in Dublin, this has been expanding into classes which, although one could consider ‘niche’, have considerable importance for the market. One of the striking examples of this development is in credit reinsurance.
Royal Bank of Canada Financial Group has been present in Ireland via its reinsurance subsidiary, RBC Reinsurance (Ireland) Limited, since the end of 1998. Among the key strategic areas that RBC wishes to expand through its Dublin operation is trade credit reinsurance. This line of reinsurance has been around for over 50 years and is predominantly a European based product. Credit insurance is designed to protect merchants and manufacturers against financial losses due to bad debts, usually in respect to trade credit and accounts receivable.
The credit insurance and reinsurance markets have been growing at the rate of 5% per annum over the last number of years and this growth rate is expected to increase with the new opportunities in Eastern Europe and China.
RBC has committed itself to this business for a number of years now and enjoys a growing share of this segment of the reinsurance market. The bank plans to increase its share substantially over the next number of years and has invested significantly in Dublin to make this happen. As the business is primarily European based, we believe it makes sense to be located in Europe and Ireland was seen as the logical choice due to the favourable regulatory environment, passporting ability as a member of the EU, and the significant talent pool that exists in this country.
Expanding into European trade credit reinsurance makes sense for a bank-owned reinsurer for many reasons. Firstly, it involves the assumption of credit risk, which obviously is something the bank knows quite a bit about. Secondly, as a leading North American bank, RBC has limited exposures to European entities; hence the bank has a great appetite for acquiring credit risk to entities like big European retailers. Thirdly, the bank’s strong debt rating at AA- from Standard and Poor’s gives us a significant market edge; and fourthly, being part of a bank means that we can leverage off the sophisticated credit risk management tools in modelling our risk.
Credit insurers fulfill a dual role, both underwriting the policy and setting the debtor limit. What gives us a strong comfort is the level of sophistication that these entities bring to their underwriting and risk monitoring processes. Being part of a bank, we understand how credit should be managed and recognise the strength of the insurers’ risk management systems and how they proactively manage exposures during the coverage period.
Credit insurers employ sophisticated real time analysis and information systems to track the performance of their exposures. In addition, the insurers have embedded themselves into their clients’ infrastructure with real time data feeds of invoices and shipments. Risk is further mitigated through the bulk of trade credit exposures being short term, typically in the 60 to 180 day range. Additionally, the tangibility of the goods being traded means that there is often the ability for portions of losses to be salvaged.
What we also like about the business is its robustness during economic downturn. The trade credit market continues to be a profitable sector despite the economic woes suffered in the majority of central European countries. As discussed, the short term nature of the exposures, coupled with the credit insurers’ ability to cut back on limits exposure once a company deteriorates significantly, limits the risk of substantial loss. Of course, there is always the risk of a sudden collapse, such as the highly publicised large blue chip corporate bankruptcies of 2002-2003 but, statistically, these occurrences are very rare. In addition, one of the key and consistent success features in this business is the comparatively high recovery rate on defaulted receivables which, when compared to the average recovery rate for senior and secured bonds, is approximately double.
As we expand the business, the Dublin office will work closely with our affiliate offices in Canada and Barbados. Our credit team, which currently totals eight are all seasoned credit specialists with insurance, banking and capital market backgrounds. At the moment, we are strengthening our team here in Dublin. We are currently hiring a quantitative analyst and plan on hiring additional staff as we build up our presence in this sector.
Having a Dublin office also adds credibility to the bank’s strategic push in this area. The large investment that RBC is putting into resources and technology in Dublin demonstrates our commitment to the business and shows that we are in this business sector for the long haul.
As we continue to develop the Dublin office, we will be able to increase our face to face contact in the European marketplace which is culturally an important part of doing business in Europe. The efficiencies being afforded by being in the same time zone as well as the close proximity to several different cities in Europe will mean a greater ability to not only develop stronger relationships with our client base but to enhance our knowledge and monitoring of our key exposures.
With the credit market growing at a steady pace, in addition to the sophisticated risk approach in this market and the Irish regulator (IFSRA) remaining very accessible and open to discuss the sector’s concerns, we have the firm belief that international credit reinsurance written from Ireland has a bright future.
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