Equinox Global’s Mike Holley: Sticking to the limits
By Rasaad Jamie
The next three years will be a challenging time for the trade credit insurance market. It will however, present Equinox Global with the opportunity to impose itself on the market in a very dramatic way, according to chief executive, Mike Holley
When trade credit specialist Equinox Global unveiled its latest product, Equinox Complete, in November last year, it was the fulfilment of a vision which five years earlier had inspired the launch of the company itself, the company’s chief executive, Mike Holley, says.
On the face of it, Equinox Complete is a whole turnover credit insurance policy with no deductible aimed at the mid-sized to large corporate market. The particular combination of features which distinguishes the policy from those on offer elsewhere in the market is the conjunction of a credit limit service with non-cancellable limits. This, Holley says, provides Equinox Global’s clients with unique certainty of cover in the currently uncertain economic environment.
The credit insurance market, in general, offers very little in the way of certainty of cover. Under the terms of the vast majority of credit insurance policies, the insurer can withdraw cover from a client midway through the policy year by cancelling the credit limits without consultation.
When Equinox Global was founded in 2010 as a managing general agency (MGA) and Lloyd’s coverholder, it was with the unique commitment that the company would not arbitrarily withdraw cover from a client during the policy period, something many credit insurers had done throughout the credit/financial crisis during the previous two years.
The credit crisis, Holley says, only really became manifest after Lehman Brothers collapsed in September 2008. Until then, even though the crisis was undeniably an issue for the financial markets, it did not touch real people’s lives. “So the trade credit insurance market was incredibly soft right up until September 2008. But things turned very quickly. It felt like the world was ending. Lehman Brothers went. AIG went,” he says.
“The banks were collapsing and credit insurers, all at the same time, experienced an overwhelming flood of payment defaults. And so, the way in which the crisis manifested itself in our market was that insurers started cancelling credit limits.”
The turning point for Holley – who at the time was working for Atradius as director of special products, managing a team of London-based trade credit and political risk underwriters – was when the UK and other European governments got involved because of the devastating impact the credit crisis was having on trade. “I sat in on a lot of meetings with the British government, which was trying to set up a mechanism to compensate for the cover that was being withdrawn by the private market.
“One of the things that was quite shocking for me was how the government officials who were trying to come to grips with the issue could not understand how credit insurers could just withdraw cover like that.”
For Holley and some of the other representatives from the credit insurance market present at those meetings, that was simply the nature of the credit insurance market – how things had always been.
“It is clearly convenient for credit insurers to operate on the basis of a system where they can cancel the cover at any time. It makes it much easier for them to manage their risks or to negotiate a turn in the market cycle. And because credit insurers have an oligopoly, it is possible for this to happen. “Attitudes change very slowly in our market. But that was quite an important moment for me: to see for the first time how intelligent, educated people not involved in the market responded to our product. That really got me thinking about the possibility of doing credit insurance in another way.”
The search for that “other way” led to the foundation of Equinox Global with the support of Lloyd’s insurers Beazley, Pembroke, Aspen and Liberty Mutual in November 2010. The MGA’s product offering was based on certainty of cover and consistency and total transparency around credit limits, including the provision of a service whereby Equinox Global, through discussions with the insured, sets individual credit limits for each of the insured’s customers.
“All of our products have one thing in common which is certainty of cover. But an important component part of our offering is what we call our trigger policy where we monitor our customers’ customers for them. That monitoring is done on the basis of a trigger configured around the financials of the customer’s customer.”
In 2010, largely due to information technology constraints, Equinox Global could only offer its product in a limited way to a select number of customers: mainly to the bigger corporations which tended to have larger, but fewer, credit limits per policy, which meant fewer limits for their credit insurer to monitor. In addition, large corporations also have their own very sophisticated credit monitoring and management systems which serve as a further risk mitigating factor for the insurer.
Over the past five years Equinox Global has invested heavily in the development of its IT systems, to the point where it can now offer its products, which were previously only available to large corporations, to mid-sized companies. “It was always our objective to do this but it has taken us a while to improve our technology. The development of our IT system is something that we work at all the time,” Holley says.
A fully functioning credit insurance company requires a very robust and sophisticated IT system, according to Holley. “That’s because you need to be able to monitor the financials of firms all over the world in real time. When we started out in 2010, we tended to have either a non-cancellable policy or a trigger policy. But with our Equinox Complete product we have started to blend those elements together.
“So while the majority of our credit limits will be non-cancellable, what you find is that in every portfolio, you have good risks and you have some risks which are not so good. What we are trying to do is use the financial trigger as a mechanism within Equinox Complete to manage the risks around the not so good risks.”
Equinox Global uses its credit limit monitoring capability as a risk management tool across its overall portfolio and not just for its trigger policy products. In fact, Holley sees the interactive relationship between Equinox Global and the vast majority of insureds as the true value of offering a non-cancellable credit limit to clients.
“It creates a platform for interaction between us and the insured. There is an open exchange of information. The insured benefits from our systems and experience because we get to know and understand their business and when we spot something unusual with a company that we know the insured has business with, we will call up the insured and have a dialogue. That for us is the difference between cancellable credit limits and non-cancellable credit limits.
“When you can’t cancel credit limits, you actually have to reach out and talk to the insured and inform them that there is this problem with one of their counterparties. We tell them what information we have and what our assessment of the situation is. We ask them about their assessment because a vitally important factor for us is the insured’s experience and knowledge of their clients who they meet with regularly. So, on that basis, we put our heads together and decide what to do collectively,” Holley says. The company also offers a “top-up” trade credit insurance policy, a product which, according to Holley, has only emerged in the wake of the financial crisis. Holley describes it as a form of non-proportional, excess layer insurance which addresses shortfalls in the credit limits provided by other insurers. “Traditionally, trade credit insurers did not co-operate with each other. There would be a fight to the death for every customer which basically meant one credit insurer for each customer. But what that also meant was often the customer would not be able to obtain all the cover they needed because the credit insurer that won the business was not in the position the level of cover required.
“One of the really positive things that has happened over the past five or six years in the market is that there is now a much greater degree of co-operation between trade credit insurers to provide the customer with the capacity and service they need.”
Equinox Global has increased the number of capacity providers from four in 2010 to eight in 2016. Of the original four capacity providers, Aspen and Liberty Mutual are no longer part of the panel. Beazley and Pembroke have been joined by Amlin, Channel, Canopius, ANV, Chaucer and Barbican.
Most of Equinox Global’s capacity providers write trade credit insurance on their own account, but they write different risks in a different way to Equinox Global, Holley notes. “Some of them provide trade credit cover on a reinsurance basis which we don’t do. None of them write trade credit business on a portfolio basis in the same way as we do. Quite a few of them provide standalone transaction trade credit cover which we don’t do. What they are looking for from us is complimentary business.”
He cites Beazley, which has a very well regarded political risk and trade credit insurance business, as a very good example of the typical Equinox Global capacity provider. “Beazley insures a lot of standalone transactions many of which are emerging market transactions. Often the business is written on a long-term basis. By comparison, our business is mostly in developed markets and the business is insured on a short-term basis.”
Equinox Global renewed its binding authority arrangements with its capacity providers – which are led by Beazley, which provides 31% of the MGA’s total capacity – last November. Like most trade credit insurers, Equinox Global expresses its underwriting capacity on a per risk or per credit limit, basis, which in the case of Equinox Global is $50m.
“This is not per policy. It is per our customer’s customer. So you might have a policy which has a limit or aggregate of $300m. But $50m is the maximum that we can write per customer’s customer according to the terms of our delegated authority. It is the maximum before we go for special acceptance. So we can write a bigger line, but our delegation is $50m per customer’s customer,” Holley says.
The fact that Equinox Global’s portfolio is spread over five different territories means the current $50m limit allows the company quite a bit of “headroom” in terms of managing aggregation of risk, according to Holley.
Equinox Global’s incursion into middle market trade credit insurance risks has also resulted in the creation of, in April last year, a dedicated, in-house claims function, led by John Davison who was recruited from specialist broker Credit & Business Finance Group. “When we started out in 2010, we mainly issued policies with fairly large deductibles. This was more catastrophe-type business. But with the development of our Equinox Complete policy and as we penetrated deeper into the middle market, we started to insure the smaller accounts as well, which necessarily mean a higher level of claims traffic,” Holley explains.
Equinox Global has expanded its operations significantly over the last four to five years, establishing itself in the UK, France, Germany, the Netherlands and in the US. Holley describes 2015 as another year of growth for the company. “Our offices are now rooted more deeply in those markets. They are more accepted as part of the local market. Our level of enquiries and our premium income has grown significantly over the last few years.”
However, unlike in 2014, Equinox Global began to feel the impact of the soft market in 2015. “So that provided us with a little bit of a headwind last year, but we continued to grow because of the momentum we had built up over the previous years. And, despite the soft market, our retention rate has been very good in 2015/16. We have managed to hold on to all our clients.”
In many countries, however, the credit insurance market continues to benefit from constrained bank lending, which has led companies to look to trade credit insurance to finance their short term growth, typically through asset based borrowing. This situation, according to Holley, is likely to continue for some time. “For the banking sector, complying with the new capital requirements and the restructuring of the banks are long term projects which are going to go on into the 2020s before they are complete. So there will continue to be constraints on bank lending over the next few years.”
But this, Holley says, does not mean the credit insurance market is insulated from the current very soft conditions in the broader insurance market. “We are not protected from the soft market. But different insurance lines don’t exactly follow the same market cycle and credit insurers have actually been a bit lucky because our market stayed harder for a bit longer as a result of the aftermath of the financial crisis. Of course, in Europe, the financial crisis unfolded several years later than it did in the US. And Greece is not over yet.”
But while the financial difficulties in the EU have helped to maintain trade credit insurance rates, the market is subject to the same flow of capital into the broader insurance market. Credit insurers, according to Holley, really started to feel the impact of the soft market last year.
“The trade credit reinsurance market is awash with capital which, in many ways, is posing a serious threat to the stability of the market because rates are falling while exposures are increasing. Indeed, given the ratio between the rates charged and the size of the exposures, there is the danger that the market might experience another credit limit cancellation event should the economic situation change.”
Shift in the cycle
Although there is widespread agreement the long period of extremely low interest rates will have to come to an end, there are no indications from the central banks that they know how to successfully manage the transition from the current low interest environment to a more normal environment, Holley suggests.
“Mishandling that transition could most likely upset the economic apple cart. For example, if you look at the UK at the moment, there are still a large number of companies with significant levels of debt. In many ways, these companies have been like zombies since the last crisis.
“Somebody of my age remembers a time when the mortgage interest rate was as high as 21%. There are huge numbers of people who have mortgages today who think an interest rate is something which never goes above 4%. But it will go above 4% again and then, what will happen? There are some quite big uncertainties in the future.”
He thinks there will very likely be a significant change in the economic cycle over the next one to three years, although he hesitates to refer to that change as another crisis. “It might be. But one should be careful about imagining that the future is going to be exactly like the past. It won’t be the same.
“It is nearly eight years now since the last big economic event and that is a long time for an economic cycle. When that event occurs, it will test everything we have built up to now. Our product offering in particular will be tested. For example, there is the question of how will these non-cancellable limits behave when the economic cycle turns and the banks are pulling back their lines. That will be a critical moment for us and we need to be prepared because it will be an opportunity for the company to step up to the plate in a very dramatic way.”
This article was first published in Insurance Day on 20th January 2016