Risk mitigation is an element of export credit insurance
Through reinsurance, Finnvera prepares for increased exposures and, in particular, strives to mitigate the concentration of risks in certain sectors.
As part of the company’s risk management strategy, Finnvera has revised its portfolio reinsurance for export credit guarantees. Through reinsurance, Finnvera prepares for increased exposures and, in particular, strives to mitigate the concentration of risks in certain sectors.
Owing to the structure of Finnish industry, exports are heavily concentrated in a few sectors. This underlines the importance of Finnvera’s risk management system. In addition, individual export transactions, such as orders for cruise vessels, may be very large. According to the international evaluation report published in March 2017, Finnvera’s management of risks and exposures is at an excellent level in international comparison. In reinsurance, Finnvera is a pioneer among export credit agencies.
The renegotiated, more extensive portfolio reinsurance entered into force on 1 July 2017. Portfolio reinsurance covers a significant share of Finnvera’s risks related to export credit guarantees and is tailor-made to cover Finnvera’s risk profile. The revised portfolio reinsurance has multiple levels so that it would encompass all of the necessary exposure volumes. In order to ensure the scope of coverage, reinsurance is provided by several international reinsurance companies.
Internationally, Finnvera is one of the first export credit agencies whose risk mitigation strategy has included systematic risk mitigation through reinsurance for years. In addition, Finnvera’s activities are always based on controlled risk-taking and an analysis of the buyer, sector and country.
“Systematic commercial reinsurance is not necessarily a part of the functions for all Export Credit Agencies. The expectation for long-term self-sustainability for export guarantee facilities are derived from international legislation but also included in the direct legislation governing Finnvera’s activities. This means that we are obliged to cover our expenses with our income. Reinsurance covers us from export risks much in the same way as a normal home insurance covers your house or belongings in advance, before an accident has materialized. It’s too late to think about purchasing home insurance when your kitchen is on fire,” says Senior Adviser Jenni Ruotsi from the Large Corporates Unit of Finnvera, who is responsible for reinsurance.
“We are concerned because surveys indicate that only one third of Finnish SMEs have coverage against export risks, and we want to practice what we preach. To ensure the continuity of our activities, we must have coverage against risks that cannot always be predicted. As a state-owned export credit agency, our task is to support Finnish export companies so that they can secure deals abroad. Without Finnvera’s risk-taking, many export transactions would not materialiseOur exposures are large, but we must act so that the potential realisation of the risk would not endanger self-sustainability even over the long term,” says Ruotsi.
Finnish companies have signed large export deals, which is positive for the Finnish economy. Owing to increased demand, the maximum amounts of Finnvera’s export credits and export credit guarantees were raised twice during 2016 through legislative amendments. On the basis of figures from the first few months of the year, the increased authorisations have really been needed.
Finnvera’s export financing has focused particularly on three sectors: telecommunications; shipping companies and shipyards; and the forest industry. So far the only larger risk realised during Finnvera’s existence was in the telecommunications sector. In 2016, Finnvera reported that it was preparing for a more substantial loss in Brazil. Thanks to reinsurance, the loss is considerably smaller than it might be otherwise.
Sectoral concentration is a well-known factor that is part of the nature of export credit guarantees.
“It is typical of export credit agencies that their exposures weigh heavily on an individual sector that dominates the industrial structure of the country in question. For instance, in Denmark the focus is on wind power, in Norway on the oil sector and in Italy on the shipbuilding industry. The emergence of concentration risks is also the reason why export credit agencies, in the end, need support from the government for their activities.”
In addition to portfolio reinsurance, Finnvera uses and actively develops other methods for insuring covered exposures, such as one-off policies pertaining to a specific risk. The same risk can be covered in various ways, and in the same way as the buyer of a house uses the house purchased as collateral, the export trade may also include the use of collateral.
“The search for new insurance methods is part of Finnvera’s risk management strategy. Our aim is self-sustainability in the long term, and we want to be proactive. Reinsurance is one area where we want to continue to be a pioneer among the world’s export credit agencies.”
Jenni Ruotsi, Senior Adviser, tel. +358 50 352 2430