Aon UK Limited is authorised and regulated by the Financial Conduct Authority Postmodernism in Trade Credit Insurance The beginning of the end or the end of the beginning? ICTF – October 2013 Stephen Taylor, Executive Client Director Aon Trade Credit t: +44 (0) | m: +44 (0) e: |

Agenda  A quick recap –What is credit insurance? –Benefits –Why credit insurance matters?  Beginning of the end? –UK perspective –Impact of credit crisis –How the credit insurance industry has adapted?  End of the beginning? –Global perspective –Practical credit management solutions –Future predictions 1 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

A quick recap.....what is traditional credit insurance? 2 SellerBuyer Credit insurer Insure credit risk Payment for goods / services Goods / services on credit terms Premium Insurance Bank Advance payment Beneficiary  Protects the “debtor” asset  Insures against non-payment (credit & political risks) by the debtor i.e. bad debts  Relates to B2B transactions  Trade related (not a financial guarantee)  Covers domestic sales & exports  Purchased by SMEs, corporates, multinationals  Discretionary purchase  Different policy structures,.e.g. ground up, top account, catastrophe  Purchasing drivers vary for each business Aon Risk Solutions | Global & Specialty Clients | Trade Credit Bank involvement where financing

A quick recap.....the benefits 3 Protects from bad debt Risk prevention - Identifies and avoids expected losses - Greater insight into customer’s likelihood to default Enhances working capital -Facilitates access to improved financing -Balance sheet engineering -Additional banking lines Embeds credit management disciplines -Enables companies to extend credit terms -Reinforces credit management -Access to credit risk expertise and analysis Helps grow your business -Supports mergers and acquisitions -Promotes sales growth whilst maintaining credit management controls -Directs and supports sales to higher margin markets Risk transfer - Transfers credit risk to insurer’s balance sheet - Reduces bad debt provision Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Global market share – why credit insurance matters! 4 Source: ICISA  Globally trade credit insurance covers nearly €2tn of commercial exposures  Equivalent to 15% of global business receivables on credit terms Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Current dynamics – impact on credit insurance?  Economic & Political –US debt ceiling – sorted for now! –Japan – stimulus package –Government debt levels – how long can these keep increasing? –Low interest rate environment –Political Risks, e.g. Egypt  Financial Institutions –Impact of Basel III –Increase in demand for less conditional credit insurance products  Solvency II –How will this impact insurers – capital allocation and pricing?  Social Media –How to manage the information flow? 5 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Aon UK Limited is authorised and regulated by the Financial Conduct Authority The beginning of the end?

A question of perspective – UK statistics 7 YearNumber of policiesAverage premium rateInsured turnover (£M) , %203, , %192, , %198, , %222, , %258, , %281, , %302, , %269, , %240, , %312, , %300,655 (Source ABI) Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Observations – UK market  2002 to 2012: –Policies purchased down 15% –Average premium rates down 30% –Business insured increased by 48% –Total premium relatively flat over period 8 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

2008 Credit Crisis – credit insurance hits the news! 9 Aon Risk Solutions | Global & Specialty Clients | Trade Credit "Credit insurance takes centre stage" – Financial Times Oct 2008 "Companies feel chill as trade credit insurance dries up" – Financial Times Nov 2008 “Trade credit insurance withdrawal bites” – The Telegraph Nov 2008 "Blow as credit insurer halts cover" – The Independent - June 2008 “Woolworths hit by credit insurance withdrawal” – UK business news Oct 2008

Client Experience 10 Aon Risk Solutions | Global & Specialty Clients | Trade Credit Credit limit cancellations and reductions Increased rates and tighter commercial terms Claims under greater scrutiny

Impact on the insurer market  Business model unable to respond to economic storm  Claims haemorrhaging  Capacity and appetite reduced  Rebalancing of exposure/premium ratio  More stringent risk underwriting model and greater sector weighting  “Survival” rather than growth objectives  Increase in rates by circa 40%  Government involvement 11

2008 – common comments from clients  “The umbrella is taken away when it rains! – Insurer withdraws cover at a key time”  “The insurer doesn’t provide a notice period prior to withdrawing cover”  “I will pay more for additional capacity”  “Cover is expensive”  “Will claims be paid?” How did insurers adapt? 12 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

2013 solutions – how credit insurance market has improved  “The umbrella is taken away when it rains! – Insurer withdraws cover at a key time” Growth in XoL ‘non cancellable’ credit insurance product –2008: Ace, AIG, Atradius Special Products Others where small number of endorsed limits –2013 Ace, AIG, Atradius Special Products, Equinox, Euler Hermes, Markel, QBE, XL Others where small number of endorsed limits 13 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

2013 solutions – how credit insurance market has improved  The insurer doesn’t provide a notice period prior to withdrawing cover” Notice period on credit limit changes –2008: No notice period unless specifically negotiated. –2013: Delayed effect / grace clauses Atradius: 30 days+ Euler Hermes: 30 days+ Coface: 30 days+ –How much further will notice periods increase? 14 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

2013 solutions – how credit insurance market has improved  “I will pay more for additional capacity” Top-up Cover –2008: “limit plus” from Aon Other insurers – selective basis –2013: Coface “Top Liner” Euler (CAP) Atradius “limit plus” from Aon Other insurers – selective basis 15 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

2013 solutions – how credit insurance market has improved  “Will claims be paid?” –The market has paid claims...for example: Schlecker Game Centrotherm Petroplus Ukraine/Kazakhstan Banks Korea Line Libya –Claim payment response times have improved 16 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

2013 solutions – how credit insurance market has improved  “Cover is expensive” –Increase in market capacity. –Softer market average premium rate 0.11% (2012) versus 0.13% (2006) (UK) BUT, price is only one aspect Key is the value proposition 17 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Trade credit insurance – value proposition Value to the Insured Aon Risk Solutions | Global & Specialty Clients | Trade Credit Cost 100 Information 10 18

Trade credit insurance – value proposition Value to the Insured Aon Risk Solutions | Global & Specialty Clients | Trade Credit Cost 100 Information 10 Sales 20 19

Trade credit insurance – value proposition Value to the Insured Aon Risk Solutions | Global & Specialty Clients | Trade Credit Cost 100 Information 10 Sales 20 Cover 20

Trade credit insurance – value proposition Value to the Insured Aon Risk Solutions | Global & Specialty Clients | Trade Credit Cost 100 Information 10 Sales 20 Cover 20 Finance

Credit Insurance –Credit management view of trade credit insurance changed? More focus on value of product Additional investment in risk information/systems New solutions used to manage credit and political risk Captives utilised where appropriate –Insurer model improved Balance sheets survived the crisis Reinsurance position positive Total Potential Exposure more closely reflects actual insured business High quality of risk information held Better value proposition 22 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Aon UK Limited is authorised and regulated by the Financial Conduct Authority The end of the beginning!!!!

Observations  Global credit insurance market is growing  Purchaser behaviour is more sophisticated  Insurer product offering is improving 24 Aon Risk Solutions | Global & Specialty Clients | Trade Credit  Broker role changing  Technical knowledge and service important  Risk advisory/consultative  Integrated Credit, Political Risks and Surety offering

Credit, Political Risks & Surety: Product Overview Aon Risk Solutions | Global & Specialty Clients | Trade Credit Demand Low Medium High Supply - Market Capacity LowMediumHigh Supply Bonds Financial Guarantee Single Risk & Syndication FI - Structured Trade Credit Deferred Consideration Mark to Market Multi Debtor Ground Up Multi Debtor – XoL Performance Bonds Top Up 25 Subjective: demand / supply side will move depending on the risks/geographical location

Practical credit management solutions  Scenarios –Insured doesn’t want to rely on insurer credit limits – ‘tail wagging the dog’ –Insured only worried about concentration risk –Insured wants to include Insurer risk information within credit management model –Opportunity to increase sales with the buyer, but the buyer doesn’t want to increase collateral –Insured wants to improve financing: Trade Finance Financial Institution use of product 26 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Self underwritten programme  The problem: Insured doesn’t want to rely on insurer credit limits ‘tail wagging the dog’ –Large multinational – European sales –Client wanted greater autonomy setting credit limits –Sophisticated credit management –Good visibility of customers financial strength  The solution: –Self underwritten programme - full autonomy in the Insured’s credit management –XoL structure -100% cover sitting in excess of bad debt provision/captive 27 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Single risk & syndication  The Problem: Insured only worried about concentration risk in portfolio –Global company –Client worried about impact of bad debt on share price –£100million exposure on single automotive risk  The Solution: –Syndicated Single Risk –5 insurers –Claims co-operation agreement –Non-payment Cover - 90% Indemnity –Cost of insurance transferred to the Obligor via a finance charge 28 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Top Account 29  Covers key exposures, to which real catastrophe risk attaches.  It is ideal for companies that have no requirement to insure its entire ledger, yet wish to cover its largest strategic buyers. Covered top accounts must be named buyers and a valid credit limit must be in place. A claim can be payable for the whole loss amount – above the first loss level. If it is a top-trader, limits must be applied for on all exposures above a pre-agreed level Individual losses over policy period Uncovered account Covered “top” account First loss level Top account level Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Risk Intelligence  The problem: insured wants to include Insurer risk information within credit management model –Global company - telecoms –Investment in credit management model –Wanted to benefit from ‘live’ risk intelligence –Did not want to purchase insurance  The Solution: –A few potential solutions: 1.Insurer risk information only 2.Independent credit management software company 3.Aon Trade Manager –Helps with debtor analysis, portfolio management and data transparency –Helps reduce DSO –Risk concentration more accurately identified Insurance purchased selectively 30 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Supply Bond: helping the buyer increase sales!  The problem: opportunity to increase sales with the buyer, but the buyer doesn’t want to increase collateral. –Retail sector. £10million current exposure secured by Letter of Credit –Opportunity to increase to £30million –Buyer did not want to provide an increased Letter of Credit, due to impact on its financing facilities  The solution: –Surety markets used to issue a supply bond –On demand bond –Buyer’s finance facilities improved –Increased Sales –Niche solution Could also use credit insurance, if conditional wording accepted 31 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Trade Finance 32 Aon Risk Solutions | Global and Specialty Clients | Trade Credit Buyers Seller Credit Insurance (90% to 100%) Collection account Bank Payments Sales Receivables Invoicing Bank purchases AR from seller for up to 100% of face value Seller pays interest monthly in arrears based on daily LIBOR Joint insured Invoice discounting process Insured wants to improve financing:

Financial Institutions: use of product  Credit Insurance is used to support a number of areas: –Supply Chain Finance –Trade Finance –Export Finance –Revolving Credit Facilities –Acquisition Finance –Bonds  How can non-payment insurance be used to help your company’s financing? 33 Aon Risk Solutions | Global & Specialty Clients | Trade Credit

Future Predictions 34 Aon Risk Solutions | Global & Specialty Clients | Trade Credit –Improved Insurer model to weather the next economic downturn –Globally multi-debtor and XoL markets will grow –Geographical hot spots –Single Risk & Syndication will become more important –Financial Institutions use of product will increase –Use of risk intelligence products will increase –Broker expertise, innovation and approach important

35 Aon Risk Solutions | Global & Specialty Clients | Trade Credit Thank you for listening Stephen Taylor, Executive Client Director Aon Trade Credit t: +44 (0) | m: +44 (0) e: |