Export boost transforms German credit market

Over the summer there was some very positive news about the German economy. The German Federal Statistical Office (Destatis) announced that gross domestic product rose by 2.2% in the second quarter of 2010 on the previous quarter. “Such a quarter-on-quarter growth has never been recorded before in reunified Germany,” said Destatis.

“At the same time, the result for the first quarter of 2010 was revised substantially upwards, now showing a 0.5% increase. Hence the recovery of the German economy, which lost momentum at the turn of 2009/2010, is really back on track.” And as a result, in August the Bundesbank revised its economic forecast for 2011 up to 3%, up from the 1.9% it predicted back in June 2010.

According to Destatis, the growth can be largely attributed to foreign trade. And with the German economy so reliant on export growth, the role of trade credit insurance becomes even greater. Which is perhaps why the German government, along with other European countries, brought in a top-up scheme last year to aid the credit insurance market when the economic crisis hit, providing 7.5bn of guarantees.

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However, the scheme has not been popular, with either buyers or insurers.

The credit insurance market in Germany, dominated by Euler Hermes, Atradius and Coface, did not believe that the market had failed and that therefore state intervention was unnecessary.

Helmut Piplack, CEO of Aon Credit International Germany, said, “The government top-up guarantee scheme for credit insurance has generally not been helpful for companies in Germany as it was introduced too late, it is too expensive and it is too inflexible. Usage has been limited and we do not believe that it is likely to be extended.”

According to Euler Hermes, figures show that in January 2010 it started with 144 policies and 11.8m cover. At the end of July 446 policies with a covered volume of 120m were issued.

Euler Hermes pointed out that German credit insurers have around 37,000 policies with covered transactions of 254bn in their portfolio as of May 2010, and said that ‘it could be the case that the private insurance sector is offering sufficient coverage for the market and for a reasonable price.’

As with much of Europe as the economic crisis hit, German buyers faced restrictions in trade credit insurance coverage and withholding of limits at very short notice, and much was blamed on a lack of communication from credit insurers to buyers.

Observers have said that they believe that the insurers have raised their game and are now responding better to the needs of buyers. “There is no doubt that credit insurers have learned, during the global recession, the importance of clear communication both with policyholders and with the buyer about risks insured,” Mr Piplack told Commercial Risk Europe.

The market now is said to be very different from the one that caused buyers so many problems during the crisis. Then, insurers culled credit limits at the much riskier end, pricing increased considerably and there was poor communication from insurers, with buyers seeing daily changes. And some trade sectors were being hit much harder than others.

Now, Mr Piplack said, “The credit insurance market in Germany is stable at this time. There are few signs of selectivity. The credit insurers are underwriting on the same basis as before the crisis. Prices are, on average, reverting to the level seen at the beginning of 2009.”

Euler Hermes pointed out that while all credit insurers have been affected by the same risk situation during the crisis, the total number of contracts held by all credit insurers is largely unchanged from before the crisis. The credit insurer added that ‘the market will have to prepare for a hesitant economic growth in Germany and in Europe. This applies to all competitors including Euler Hermes.’

On prices, the Euler Hermes spokesperson said, “We intend to establish a risk-adequate price level by the end of the year, that is we will implement price increases, but only until the end of 2010. At present, the price level is extremely low and not adjusted to the risks. We will further increase risk coverage, not as a result of the development of individual sectors, but based on the general economic recovery.”

And as the latest economic figures show, the economic recovery appears to be in full swing in Germany.

This is also backed up by another set of figures of interest to the credit insurance market. Euler Hermes has reported that there has been a significant turnaround in insolvencies in Germany. Whilst there is a continuing but decelerating insolvency ‘uptrend’ in 2010, there is a ‘trend reversal’ in the offing in 2011. The insolvency trend is likely to peak in 2010, with a 1.3% rise to reach 33,100, but is forecast to be down by 5.4% in 2011 to 31,300.

“We are anticipating further growth in the processing industry and the service sector,” said the Euler Hermes spokesperson. “Continuous but slower growth is to be expected in the engineering industry and the IT sector, whereas the wave of insolvencies is gradually drawing back, for example in automotive engineering, but also in the iron and steel sector. These sectors have been most affected by the crisis and are now experiencing an extra stimulus, induced by the strong export business. However, some enterprises have difficulties financing the economic upswing, and it is thus important to remain vigilant,” he continued.

As so often with the economy, worries about double dip recession and the fragile nature of the recovery mean that vigilance is the all-important word.