6.4 Premium
6.4.2 Premium determination
The premium asked by Gerling NCM (public account) depends on two fac- tors, a category division of countries, and a category division of debtors. Box6.1has an example of a debtor classification. The country classes are de- termined by risks and difficulties in countries. For the commercial risks there are seven categories of debtors. This is a clear and straightforward system. The system makes it easy to determine what the amount of premium will be in different cases, but does not solve the problem of determining the degree of risk of the transaction. There are discussions by insurers and exporting companies about quitting this system, because it can lead to unfair deci-
sions3. The solution would be a risk management system in which premiums are determined based on the characteristics of a single transaction. However, such a system may lead to extensive discussions about the premium for each transaction.
Example box 6.1 Debtor categories
The seven categories of debtors used by the government:
1. Monetary Authorities;
2. Central Government;
3. Lower Government;
4. Good Banks;
5. Standard Banks;
6. Good Private Debtors;
7. Standard Private Debtors.
The country classes are the same as the categories mentioned in Chap- ter 5.
The export credit insurance for account of the government is complemen- tary to the market and cover costs over a certain period of time. The country in question and the term of agreement (short, medium or long term) are important in setting a premium price.
The determination of premiums for political risks within OECD coun- tries has been harmonized. The harmonized premium price is largely based on the average premium prices of the various ECA’s for OECD countries. This harmonization is established to limit competition between OECD coun- tries. According to the agreement the price of the political premium may go up, but it is not allowed to decrease. For commercial premiums there is no harmonization yet, but this may change in the future. Another issue of setting
3It can occur that a debtor rated lower in the category of debtors has to pay a higher amount of premium while there are reasons to believe the premium might be lower (lower risk, relationship with exporter, etc).
premium prices is the risk description. Dutch (private and public) insurance companies (used to) maintain a negative risk description (see Chapter 5). In the opinion of exporting companies a change to a positive risk description may have consequences for the premium price. However, the Dutch govern- ment has indicated that the change will not affect the rate of the full package of risks, but it may affect the rate for part of risks.
On the private market, premiums are priced at capacity. When the ca- pacity is getting smaller, and the risks increase, the premium price increases. The private market is compliant for market fluctuations. When the economic situation is in a bad condition, private insurers may leave a market, at least faster than the government. The insurance companies become more cautious in taking high risks and losses.
As argued in Chapter5, capacity in the insurance market depends on the business cycle. The number of companies offering export credit risk insurance depends on the moment in the cycle. Premiums tend to be higher when there are fewer insurers active in the market.
The opinion of the insurer about the risk is of great importance. The pre- mium depends on the market situation, the sort of risk and the country. For OECD countries, only the commercial risks will be taken into account. The exact determination of the premium by Dutch insurers varies per insurance company. For example, Coface offers one premium for all OECD countries; Gerling NCM and Euler-Cobac have a country policy, as explained before. Per industry and per country, Euler-Cobac uses a risk category with a scale from 1-10. Euler-Cobac uses a rating scale for evaluating countries, one that is also used by many insurance companies, which indicates the risk of coun- tries (AAA, BB, C, D). A country with a D-notification is not insurable. A country committee determines the scores of countries on this scale.
One Dutch broker indicated that the reputation of the company may be beneficial in setting the premium and accepting the transaction. Some insurance companies have special agreements with intermediaries (banks or brokers, for example Gerling NCM with ABN AMRO, Coface with Mee`us, and Euler-Cobac with Rabobank). Another Dutch broker acknowledges that the premium charged is partly determined by the way the risks are presented. However, it seems that the premium requested by the insurance company depends more on macro factors, such as the economic situation, than the opinion of the broker.
From the interviews, in general the following factors are involved in deter- mining the premium: profit of a company, terms of payment (30-180 days),
spread of risks, own risk of exporters, balancedness of the portfolio, possible amount of and probability of losses, industry and country involved. Generally, these factors overlap with the acceptance criteria.
Calculating premium rates
Since a large number of factors are important for calculating premium rates, databases are required to develop a model. However, these data are often not available because of the instability over time. Also the export credit data tend to be more qualitative than other insurances (see also the discussion of databases in Section 6.3).
Most private reinsurers do not have their own premium calculation mod- els. They follow the premiums of their clients, the insurers. When they con- sider a premium as too low (for example they have noticed higher premiums at other insurance companies for the same country in the same sector), they will try to have it increased.