Interim Treasurer: Cost or revenue?

| 15-12-2020 | Bas Meijer |

Temporary staff in general is looked at as ‘too expensive’ . When turnover is showing headwind, or management is under pressure by internal- or external stakeholders, cost saving is the first instrument management uses.

Agreements with expensive temporary staff is ended and fixed employees are asked to go the extra mile. This is not the case for all financial expertise.

The interim Treasurer is a good example. In the past 20 years I have experienced that interim Treasurers are able to create value to the company, and add contribution to your bottom line. In some assignments this was 1-2% of the turnover.

In general the interim treasurer should be able to have a rate of return of 3-6 months, based on a 1 year assignment. The revenue will not be limited to this 1 year assignment, but last much longer. I have experienced a much shorter period, up to 4-6 weeks.

Are you interested in cost saving, and attribution to your bottom line? Do not just let your expertise walk out of the door, but hire an interim treasurer for an analyses on the potential cost saving for your organisation. You’ll be surprised what an added value an interim treasurer can bring to your organisation.

 

Bas Meijer

Treasury Specialist

 

 

 

 

 

Alternative Risk Finance Part 4 – Risk Trading and the Future of Insurance within Treasury

| 07-12-2020 | Mark Roelands | treasuryXL

Intro

This series on alternative risk financing has been about alternatives to traditional insurance, which get are more important role in the current hard insurance environment. How to build the business case is explored in Part 2 and the alternative structure of Cell Companies is explained in Part 3. The last part of the 2020 series is about the future of alternative risk financing, risk trading and the role of treasury in insurance.

In a data driven era, with rapid advancing capabilities there may be more efficient manners to transfer or share risk, insight into risk scan be increased as well as the subsequent possibilities to retain or transfer. Although this is an outlook into the (not too distant) future, it is important to be aware of developments and get into the position to benefit from these developments preparing for 2021 and beyond, the hard market isn’t just a 2020 phenomenon.

Treasury Risk Management

Obviously, risk management is a critical part of Treasury processes. The scope of risks to be managed however within Treasury varies significantly between companies. Common risks in scope include operational risks within payment processes and financial risks like currency risk and interest rate risk. Insurable risks (like property damage and general liability) can be part of Treasury responsibilities, but can be part of legal or enterprise risk as well. Often this relates the the nature of the business as well as the size of the company. For instance, high liability type of businesses often have insurance within a legal function.

With advances in data as well as the analytics capabilities it is possible to expand the scope of insurable risks and thereby the responsibilities of Treasury. As will be explored, with further advances insurance is similar to hedging. This then comes down to matching the risk exposure with the transfer instrument, can this be matched appropriately?

 Parametric vs. Indemnity cover

Traditional insurance is well suited to high frequency, low severity events which is covered in the lower part (in terms of limits) of the corporate insurance program. A captive might be part of that area of risk as well, which has a higher degree of predictability. A multitude of small-scale losses are easier to model and manage due to the richness of historic data and the fact that the law of large numbers will enable accurate macro level predictions. Indemnity cover is based on carefully drafted wordings, and a loss has to be established before ultimately (which may take some time) a claim payment is made. The principle of parametric insurance intends to speed this process up to a great degree, as shown below.

This is not intended to declare the end of indemnity cover, this can still be highly efficient. But parametric insurance is increasingly important to complements this traditional approach to improve both the efficiency as well as effectiveness of cover.

Critical is the carefully constructed payout trigger. Traditionally this has been weather related like rainfall or windspeed at a certain weather station. This is increasingly tailor made with on-site weather stations preventing any mismatch in hitting a trigger (“basis risk”). Next to that other perils are increasingly possible, production downtime for instance can be objective measured. Lockdown measures also provide a clear objective trigger, and this is being discussed extensively. With increasing amounts of data and advanced data analytics minimizing a potential mismatch can be done objectively for a large range of perils. Basis Risk in that sense is the equivalent of retained risks in indemnity cover.

Enabling parametric cover does however mean that data should be available as well is a clearly defined model how trigger and potential loss relate. That means that (risk) data needs to be governed and managed, ensuring good quality data available to the treasurer. This may also imply that the treasury or insurance professional needs to tap into more data sources in order to model the trigger and exposure optimally.

Trading

Parametric insurance was initially developed in the form of catastrophe bonds to provide extra reinsurance capital for major disasters. Still very often this is based on large volume transactions. Global capital markets dwarf reinsurance markets in terms of capacity. The Aon Reinsurance report 2020 estimates the global pool of reinsurer capital is $532bn. This is tiny when compared to the global equity market of $75tr, a global bond market of $100tr and a global derivatives market with a notional principal value of $700tr. Insurance provides a very interesting type of risk which is not or limited correlated with traditional investment risks and provides a very interesting new asset class. Being able to transact in smaller volume, while remaining the good trigger-exposure link is a challenge, but this is being resolved with a Risk Trading platform like Ryskex. 

Integration into Treasury Processes

An In-house Bank structure is common treasury terminology, the in-house insurance structure is that fors ome treasurers. A Risk Trading hub enables to integrate the best of both worlds and create a shared risk pooling vehicle enabling efficient and effective sharing of risks within the organisation.

A key feature in this approach is Treasury Technology. The Treasury Management Platform or the Trading platform which most (dedicated) treasuries use will inevitably play a key role in the infrastructure of the Risk Trading hub. They provide the centralised point of entry and point of control for trading. Via API or other connectivity the link to a Ryskex platform is possible and allows the treasurer to trade a ‘traditional’ insurance risk as easily as USD risk, hedging any risks that the treasurer isn’t willing to retain.

Conclusion

Whether it is possible to have a parametric trigger or a step further to trade risks is work-in-progress, but as corporate insurance manager, treasurer, captive manager it is critical that initial steps are already being taken. Are you in control of your risk data (which is broader than an historical claims overview)? Which data are you able to utilize and is the data quality being managed? The roadmap for a future proof treasury starts today.

Check my previous blogs of this serie:

  1. Alternative Risk Finance in a hardening insurance market
  2. Alternative Risk Finance Part 2 – Building the Business Case
  3. Alternative Risk Finance Part 3 – Cell Company

 

 

Mark Roelands

Risk and Compliance Specialist

 

 

To Hedge or not to hedge – The Natural hedge myth

| 30-11-2020 | Bas Meijer |

Corporate firms have the primary objective to be profitable. From a Treasury perspective, the main goal is to increase cash and add value. Nowadays, an increasing amount of Corporate firms engage in international business. Therefore these firms can be exposed to unrelated business exposure, such as interest rates, FX and commodities pricing depending on the business model pursued.

How do you deal with potential orders with these kind of exposure? I have seen companies going bankrupt because they did not (fully) hedge their potential orders and applied the wrong instruments.

Exposure differentiation

In order to hedge, the distinction must be made between the type of exposure:

  • A committed exposure: invoices, signed orders
  • An expected exposure: unsigned orders, expected budget

Both types of exposures need different products to be eliminated. Do all exposures need to be hedged? No. Transactional exposures should be fully hedged. Internal loans or hidden equity not always. In general, equity is not hedged. Internal loans depends in the way these are structured. In which currency is the loan granted, what are the cash flows etc. This is tailor made.

Natural Hedge & Holistic Hedges

The Natural hedge myths: there is only a natural hedge if the cash-in and cash-out are in similar currency and at approximately the same time, and applicable to transaction exposure only. This means that there is hardly any natural hedge.

Finally the holistic approach: some providers are selling holistic hedges. In general these are based on statistical studies. Holistic hedge approach adds uncorrelated exposure to the corporates, with the goal to lower the total exposure. In the world of statistics there is always room for error. When using this approach, the corporate firms should be aware of this. Not only the board, but also the auditors. I have seen enormous errors on this approach, resulting in not eliminating the risk but increasing the risk.

Cost of hedging

Is hedging expensive? No. There are many different ways to hedge the exposures, and there are many different providers to do this. Some of these are too expensive. Use a Treasury Specialist to analyse the cost of hedging and come up with alternatives. The Treasury Specialist has a high rate of return and attributes to the bottom for years to come.

More important is to quantify your exposures. The exposures are not limited to the cash flow only, but can also be embedded in your processes. Using a Treasury Specialist will lower your cost of hedging, assures that your organisation hedges the correct exposure with the right instruments, can massively attributes to the bottom line and protect you of becoming tomorrow’s news.

Thanks for reading, comments are welcome!

 

Bas Meijer

Treasury Specialist

 

 

 

 

 

Alternative Risk Finance Part 3 – Cell Company 101

| 02-11-2020 | Mark Roelands | treasuryXL

The introduction to a most utilized form and key alternative to a traditional captive

As described in this series: an in-house insurer can be of great added value to your company. In the current hard insurance market, the possibility to utilize an own vehicle instead of the turbulent market is a direct and tangible benefit. But it is not a free alternative, the cost of setup of an insurer and operating it in a compliant manner might be too high to generate an overall positive business case. That issue is being addressed in utilising a centralised facility taking care of a.o. most of capitalisation and compliance matters, while the risk taker can operate an in-house insurer. This light-weight route is what can be named a “Cell Company”.

A Protected Cell Company, Incorporated Cell Company, Segregated Accounts Company, Segregated Portfolio Company are all different names for a centralised facility each buidling on local legislation, which we will collectively name “Cell Companies”.

In this part of the series of Alternative Risk Financing the generalised concept of a Cell Company is described.

Structure explained

Where a fully-owned captive insurance entity imposes the full requirements on the parent company, the Cell Company utilises a centralised facility, a “Core”, which provides the infrastructure to be leveraged by multiple insurance entities. In the illustration the full hexagon is the Cell Company, with the Core representing the infrastructure.

The Small grey hexagons represent the Cells, which are segregated units within the facility and which belong to a specific client. Assets and Liabilities and legally segregated from other Cells and the Core. Cell A will for instance belong to Company A, while Cell B belongs to Company B. In most Cell Company structures the number of cells is not limited to 8 but is practically unlimited. In order to generate the segregation a split is made between Cellular Assets and Cellular Liabilies (the A-H hexagons) and non-cellular assets and liabilities (The Core).


Owning Cell A will enable a client to participate in an insurance program in a compliant manner, while building on the centralised facility which provides both a compliant governance structure, as well as the required capital amount.

As an individual client a key requirement however is to fund the ‘risk gap’, any open underwriting exposure being retained by the Cell needs to be collateralised somehow. Either via a guarantee. Letter of Credit, Capital or perhaps reinsuring more of the cover. This also ensures that each cell is able to sustain itself.

Key question: Is it safe?

Leveraging on the infrastructure of another company, which also facilitates other companies raises the obvious question: is it safe? Are my funds secure, and can I be held liable for the liabilities of other companies?In short: Yes it is safe … but …it builds on carefully drafted agreements, hence careful due diligence is required.

Basically, it comes down to default legislation of the domicile involved. In the Netherlands for instance there is no separate legal form of a Cell Company, and legal segregation critical fort he structure cannot be achieved. In Malta the for instance the “Cell Companies Act” recognizes the type of entity and segregation involved. A recent Montana case also recognized the structure including legal segregation.

Domiciliation

As mentioned several times, in order to make use of a Cell Company, legislation needs to be in place recognizing this particular form of a captive. Domiciliation is one of the the key considerations when an alternative risk finance structure is considered, as has been explain in Part 1 and Part 2 of this series.

In the Netherlands the required legislation for a Cell Company is not available. Within Europe therefore either Malta, Guernsey, Isle of Man or Gibraltar needs to be utilised. With Malta having the edge being within the EU. Ireland and Luxemburg have hinted on establishing Cell Company legislation as well, but Brexit (and moving insurance companies into these domiciles) has shifted supervisory priorities and no information has been published on any plans for a few years now. While Vermont is often the go to domicile within the US, there are more States with Cell Company legislation like Montana. Establishing a Cell Company close to an office of your company could be regarded to be beneficial. Vermont however does have an extensive captive servicing industry which is also a benefit.

Within Asia Vanuatu or Labuan would be interesting domiciles and the popular captive domiciles of Bermuda and Cayman Islands also both enable Cell Companies, and both have a solid supporting industry. This however needs to pass tax requirements in the organisation.

What’s next?

In Part 1 and Part 2 Captive Insurance and Building the Business Case is described. A Cell Company can possibly allow a business case to be positive, as the cost of operating and capitalising the Company is much lower then a fully-owned Solvency II compliant Insurance company. For building the business case please review Part 2, but when considering a Cell Company also take the following into consideration:

  • Due diligence on the Cell Company itself
  • Lock-in effects with a facility provider: brokers and insurers provide the facilities, but there are also some independent facility providers

This may unlock the potential for an in-house insurer allowing you to pool your risks centrally and finance them in the most efficient manner, while operating in the most light weight manner.

Check my previous blogs of this serie:

  1. Alternative Risk Finance in a hardening insurance market
  2. Alternative Risk Finance Part 2 – Building the Business Case

 

 

Mark Roelands

Risk and Compliance Specialist

 

 

Alternative Risk Finance Part 2 – Building the Business Case

| 09-09-2020 | Mark Roelands | treasuryXL

In this 4-Part series on Alternative Risk Financing, our Expert Mark Roelands highlights upon the importance of Alternative Risk Financing.
Part I reflected the alternatives of risk financing in the current hard insurance market. Now, Part 2 reflects upon the business case and how to build it, in order to enable decision making and finally decide whether to pursue the alternative risk financing route.
Building internal support is critical in getting to the go / no – go decision. Defining the Business Case will go hand in hand with generating internal buy-in by involving internal stakeholders like tax and legal during the analysis process. This blog will be about the business case set up, and how the relevant stakeholders should be involved during the process. The business case setup then is managed together with a companies’ internal dynamic. Let’s find out how to build the business case with the relevant components……..

Building the Business Case

As introduced in Part I, a structured framework is required in order to get to structured decision making. The framework used is the Risk Financing Framework by Roelands GRC Consulting. The main question on whether to start an in-house insurer is divided in 4 sub questions with 4 modules

1. Foundation> Achieve the risk finance objectives

What is your strategy with respect to retaining risks? What risks are you willing to retain?
As a treasury department for instance, the currency exposures are managed and hedged. To a certain degree, hedging is either too costly or priced into forwards (with limited risk transfer implications). This also applies to insurable risk. A certain level of claims can be expected which will either be within the deductible level or priced into premiums. Critical is to understand what volatility is acceptable to the organisation. Stakeholder expectations and requirements can be key determinants. What headroom is available on financing arrangements and on what percentage deviations will supervisors and auditors start to raise questions? What quarterly earnings deviation would be possible, and has Covid19 changed that position? Bottom line, in most alternative risk financing structures the corporate retention is increased, and a crucial question therefore is when a negative scenario unfolds are you able to defend the impact of the insurable risk retention?

What is the ultimate objective to be achieved? 

2. People & Organisation > Matching the organisation, policies and people

How would an in-house insurer fit within your organisation? This is about aligning internally on the conditions that need to be met for an in-house insurer. There are several countries or domiciles, and several forms of captive insurance which are possible. Within the organisation risk management resources and governance structures need to be aligned. Hence,

What form of captive would match your organisation best? 

The trend in domiciliation, which is strengthened by BEPS, is offshoring or onshoring and to choose a domicile where there is substance. A treasury centre domicile would be a good alternative, as is the HQ domicile or certain domiciles which have a big captive insurance support industry. Within Europe, this would be Ireland, Luxemburg, Guernsey or Malta. Going outside of the HQ domicile may have some obvious tax consequences that will need to be addressed with the colleagues from tax. A Cell Company could be an interesting alternative, but it is important that this is understood correctly within the organisation (more on this in Part 3 of this series). The Legal department will need to be involved, and as this will have domiciliation implications, the Tax department as well. As a larger part of risk is retained within the company, it is critical that risk management processes are directed to managing the risk, and certain functions may need to be involved as well. For instance when employee benefits is a risk to be underwritten, then HR will definitely be involved as coverage provided is key.

Depending on the type of captive that is established and in what domicile certain governance structures may need to be established (for instance in the Netherlands, the Corporate Governance Codes applied as a captive is an NV, implying 2 independent members of the Supervisory Board), service providers need to be found and external resources may need to be purchased. These will often become partners which the company will be working with for multiple years, so how will they be selected? Brokers and insurers offer their captive or alternative risk finance facilities, which may be very good, but there is a certain lock-in aspect to it.
Therefore, decisions need to be considered carefully.

3. Processes > Adaptive, effective and efficient operations

Relevant processes need to be established or adjusted to fit the new situation. From an operational point of view, adjustments will need to be made to ensure effective and efficient operations.

  • Premium setting: Premiums will be based on indications received during the business case setup and claims analysis. Furthermore, they need to be allocated to operating companies on an arms’ length basis. This will require some analytical input. Usually, a fronting insurance company is involved in taking care of premium collection and direct policy issuance. Otherwise, that will need to be done by the captive as well.
  • Claims handling: Which parties are involved in loss adjustment? Who is able to authorise claim payments? Will the fronting insurance company take care of it? As treasury or insurance function, there will already be some involvement. Retaining more risk provides a clear incentive for advancing control measures.
  • Cash Management: Which bank is used by the captive insurer, and can it be connected to the cash pool? Different cash pool structures may have different capital implication.
    For example, a Protected Cell Company may need to use a bank account outside of the home jurisdiction.
  • Investment: Can the captive return liquid assets to the parent company?, or do local regulations require some investments to be held in certain (liquid) categories like government bonds?
  • Capitalisation: the minimum level depending on the risk underwritten within the EU is EUR 1,2M, but usually the capital required is a multiple of this figure. Key benefit of a Cell Company is the capital efficiency (more on this in Part 3)
  • Reporting: Usually done quarterly to the regulator and depending on internal requirements on a monthly basis

Sub question for the third part: How to align processes operationally, and to highlight relevant action points which will need to be addressed once a go-decision is made.

4. Data and Technology > Generating an optimal Total Cost of Risk

Deciding on whether or not to start an in-house insurer requires a well worked out quantified business case, based upon different scenarios in order to judge the risk appropriately. In order to generate a fair comparison, a total cost overview will need to be made. This compares the total costs, which will be paid externally i.e intercompany flows like premium to the inhouse insurer will thereby be excluded. Sub question of part four is whether the business case makes sense from a financial perspective. Which costs are in scope will be determined by the analysis resulting from the previous 3 steps.  The simplified example business case below describes an imaginative Netherlands based captive insurance company. Although figures are purely indicative, the size of the amounts is representative of a captive business case.

Example Financial Business Case
x 1.000 Continuation – Expected Captive – Expected Captive – Negative
 
Total External Insurance Premium 10.000 7.500 7.500
Total Losses Retained
Below deductibles 1.000 1.000 1.000
Above (sub) limits 0 0 0
Excluded cover 0 0 0
Within in-house insurer 0 750 5.000
Operational costs
Insurance Premium Tax 2.100 2.100 2.100
In-house insurer costs 0 350 350
Insurance function costs 200 250 250
Risk Management costs 15 15 15
Total Costs 13.315 11.965 16.215
Change – 1.350 -2.900
Capital Required – 3.800 3.800

Premium observations

  • Sufficient premium volume is required. In the example, EUR 2,5 M premium reduction is assumed which will then be retained in-house and thereby is not part of the total (external) cost.
  • IPT will also have to be paid on the captive premium (@21% in the Netherlands)

Losses retained observations

  • Flip side of a significant premium reduction is a significant retention in the captive. In the below example at least EUR 5M is assumed, which will be hit in the negative scenario.
  • Usually this is complemented with an annual aggregate limit in order to limit losses in the entity
  • Part of the business case setup entails a careful claims analysis to make appropriate assumptions

Cost observations

  • Operational costs : accounting, actuarial, audit, independent supervisors as well as a cost allocation for the time used from the insurance manager/function
  • This will need to be outlined in different scenarios for decision making

Overall observation

Bottom line, in the expected scenario here a positive result is projected, but when an incident occurs a negative result (compared to traditional insurance) is projected. This is a very common trade-off requiring a deliberate choice.

Summary

Deciding to start captive insurance is a structural decision (and forms a multiyear commitment) requiring a structured approach, it may help to involve external expertise from a broker, insurer, actuaries, or independent consultants as each business case is specific. The overview in this blog however does describe the main steps and considerations to be taken. When this business case is carefully set up, assumptions clearly described and financial projections are well worked out, this then already provides a solid basis for applying for an insurance license. The initial effort will pay-off at the end, so do not rush the decision making process

This is Part 2 of the Alternative Risk Finance Series, Part 3 will be “Cell Companies 101” and Part 4 will be “Risk Trading and Future Alternative Risk Finance”. Together this generates an overview of the current and future landscape of alternative risk financing.

 

 

Mark Roelands

Risk and Compliance Specialist

 

 

Alternative Risk Finance in a hardening insurance market

| 30-06-2020 | Mark Roelands | treasuryXL

Insurance premium rates are reported to increase on average with about 2% in Europe, confirming the overall market trend of a hardening insurance market. Some markets have, however, seen double-digit growth in premiums, like D&O and Motor Third Party Liability. Other markets witnessed important coverage elements actually being excluded from cover, making the premium comparison apples and pears. As Covid-19 is impacting claims experience across all lines as well as causing negative investment returns, the hardening insurance market trend is expected to continue and get worse in 2020. Premium increases are to be expected and retention levels are expected to be increased.

It is therefore critical to work with your insurance broker in time to understand and mitigate effects for the treasury and insurance function. What is the action plan when retentions are being driven upwards or when cover is disappearing? What alternatives are available next to traditional insurance? Will your organisation be forced to retain risk above the risk appetite or accept double digit premium increases?
Although retaining additional risk may not be the worst solution, as premium increases may not reflect the actual risk that is being transferred and there are awareness benefits to being exposed to risks, the possibility to transfer alternatively is very valuable in the current hardening market.

Captive insurance

A captive is an in-house insurer, enabling efficient and centralized risk pooling while providing cover to operating companies and thereby bridging the gap between corporate and local risk appetite. Key arguments for establishing a captive are to smooth the impact of hardening insurance markets as well as provide additional flexibility in cover. The current market environment is therefore a textbook example for establishing an insurance entity. However, a captive is a licensed insurance company that comes with added costs and a compliance burden. This is especially true since Solvency II became active in 2016. As a general rule of thumb a minimum threshold of captive premium of EUR 2Mio would be required for a Dutch based captive, allowing for claims expenses (70-80% claims ratio), operating costs as well as building some reserves. Establishing a captive in other jurisdictions can make sense, as the route to licensing might still be feasible in 2020 (for the Netherlands at least 6 months are to be expected) as well as the opportunity of some more light-weight operational structures.

An interesting alternative to the fully owned, traditional captive is a Cell Company; either an Incorporated Cell Company (ICC) or Protected Cell Company (PCC). These alternatives provide the benefit of a shared structure (including initial capitalisation) and enable a ring-fenced environment for your organisation. In order to arrange that ring-fencing, specific legislation is required, which is found in Malta in the EU. Guernsey (leaving tax considerations aside) might be very interesting as well. Ireland and Luxemburg did give some hints for establishing cell company legislation but after Brexit this was delayed indefinitely. A Cell Company can provide the same functionality as a fully owned captive, but treasury and insurance will have to work with legal and tax to get a solid business case in place in order to address questions proactively.
Both Aon-Willis and Marsh have Cell Companies and would be able to assist, but insurers can also facilitate this (which has a lock-in effect) while there are also more independent providers like Artex, SRS (completing the top 5 of largest captive managers 2020) and firms like Atlas or Robus which can potentially be of added value as well.

Parametric Insurance

Next to captive insurance, parametric insurance is a promising route to follow.
Parametric insurance has historically been connected to weather insurance (e.g. rainfall exceeding a threshold leading to a pay-out) as well as longevity cover for pension funds (in the form of Insurance Linked Securities, Longevity Swaps). Parametric products enable a highly transparent and quick risk transfer and enable the route to other markets than the insurance market. A parametric product can be structured in an insurance structure but in a derivative structure as well. Conceptually an insurance-linked derivative will not be different than the plain vanilla currency instruments that are traded.

Covid is also attracting significant attention for parametric cover, as lockdown measures can be clear-cut triggers for parametric cover. Most importantly, for parametric cover clear risk information and data analysis is required and both are increasingly available. Increasingly better data and analysis techniques enable to minimise basis risk i.e. the risk in which an incident occurs but the derivative trigger is not being met. For instance site-specific weather stations are set up to ensure rainfall or water level at your organisations’ sites are being monitored. Increasingly, non-weather risks are being covered, for instance Ryskex GmbH and Axis Capital have worked together to develop  parametric cyber-insurance cover.

Where traditional insurance has deductibles and exclusions, parametric risk transfer has basis risk which needs to be managed. Next to that other operational processes may be impacted, claims management for instance and therefore it is recommended to make a well founded and analysed decision.

Roadmap

Starting financing risks in a different manner is not a decision to be made in isolation and to be done quickly. It is a structural decision requiring a structured approach. In our practice, we use our Risk Finance Framework which is composed of (1) Foundation, the objectives to be met (2) People & Organisation, matching the organisation, policies and people involved (3) Processes, adaptive, effective and efficient (4) Data and Technology, the business case based on solid risk information.

In our view, this provides a very practical and structured approach allowing stakeholders like tax and legal to be involved throughout the process. Back planning from a January renewal date, it is critical that conversations with your broker and insurers are taking place in order to ensure no last-minute surprises are presented as a treasury or Insurance professional. In parallel, the (internal) business case can be analysed in order to make a decision.

Therefore, it is recommended to start preparations early, or actually on an asap basis.
Alternative Risk Financing can be highly interesting, but it is not an instant go-to solution and requires some preparations.

 

 

Mark Roelands

Risk and Compliance Specialist

 

 

Trade Finance and ICC Incoterms

| 24-06-2020 | Ger van Rosmalen | treasuryXL

Still up to date every day: “yes do not worry sir, the container will arrive within a few weeks, i hope, it is now the rain season and roads are like rivers”. Many logistics managers are not waiting for these kinds of messages and the irritation grows when they wonders what ***** of Sales has had in mind to deliver this customer on a DAP basis.

This blog is in Dutch language.

De frustratie van iedere logistieke of customer service medewerker is als Sales iets verkoopt zonder zich echt bewust te zijn van de gevolgen en implicaties van die afgesloten deal.

Sales wil geen risico nemen als het op betalen aankomt en heeft van de koper in de binnenlanden van een Afrikaans land wel een Letter of Credit (L/C) als zekerheid gevraagd. De koper wilde die zekerheid wel geven maar dan moesten de goederen wel op DAP basis afgeleverd worden. “Geen punt” volgens Sales.

DAP wil zeggen “Delivered at Place” dus de verkoper moet alle kosten en risico’s voor zijn rekening nemen voor aflevering van de goederen op die overeengekomen plaats ergens in de binnenlanden van dat Afrikaanse land! Sales gaat er maar vanuit dat Logistiek het wel regelt maar weet niet wat voor onmogelijke uitdaging dit is als je je realiseert dat in Afrika sommige geasfalteerde wegen zomaar 5 km buiten de stad overgaan in onverharde moeilijk begaanbare wegen! Zo ook in deze casus, de dure machine moet eerst nog afgeleverd worden in de binnenlanden van dat Afrikaanse land want daar vindt het overdrachtsmoment plaats, aflevering van de machine door afgifte van een “Goods receipt” dat later onder het L/C aangeboden moet worden om betaling te verkrijgen onder het L/C!

Het was toch echt slimmer geweest om de machine af te leveren op basis van een andere  Incoterm, liever geen E- of F-term, maar bij voorkeur een Incoterm uit de C-Groep, maar welke? Het is belangrijk dat iedereen binnen het bedrijf, Sales, Finance en Logistiek de impact begrijpen van iedere afgesproken Incoterm.

Het bepalen van Incoterms strategie bij inkoop en verkoop is maatwerk; praat er over met een specialist!

 

 

 

Ger van Rosmalen

Trade Finance Specialist

 

 

Trade Finance and Compliance | How to properly assess risks

| 15-06-2020 | Ger van Rosmalen | treasuryXL

“As a result of the stricter regulations, the financial sector has been forced to hire large numbers of people. Then, in practice, after intensive investigation on every report, it appears that more than 99% of the cases are false alarms! This results in frustrating and mind-numbing work for highly skilled workers.”  Now the combination of Trade Finance and Compliance / AML (Anti Money Laundering) has been my focus for some time. I was always assuming that Compliance / AML supports the business (customers / products), but because of the stricter regulations, I think the business appears to be supportive of Compliance / AML.

This blog is in Dutch language.

Als je kijkt naar Trade Finance dan zie je dat de definitie vanuit de toezichthouder(s) en de vooraanstaande Wolfsberg Group een breed begrip is. Onder standaard Trade Finance Producten worden verstaan:

  • Documentair Betalingsverkeer: zoals Letters of Credit en Documentaire Incasso’s. Bij deze standaard producten wordt gewerkt met handelsdocumenten zoals facturen, vervoersdocumenten, verzekeringsdocumenten en oorsprongsdocumenten. Door banken wordt gecontroleerd of deze in overeenstemming zijn met de onderliggende handelstransactie. Daarnaast zijn deze producten onderworpen aan internationale regelgeving uitgevaardigd door de ICC Internationale Kamer van Koophandel. Deze regels samen met de gebruikelijke internationale bancaire praktijk hebben ervoor gezorgd dat de banken de “financial crime“ risico’s beter kunnen controleren.
  • Open Account: betalingen; het overgrote deel van de wereldhandel wordt afgewikkeld op “open account” waarbij er een simpele betaling plaatsvindt via het bancaire betalingssysteem voor geleverde goederen of diensten. Hier is de betrokkenheid van de banken ten opzichte van de onder punt 1 genoemde producten gelimiteerd tot de afhandeling van een zogenoemde “clean payment” en is men zich niet altijd bewust van de onderliggende transactie. Banken kunnen hier slechts de standaard AML en sanctie screening op de betaling uitvoeren.

Onder “financial crime” risico wordt verstaan o.a. witwassen, fraude, belasting ontduiking, omkoping, corruptie en terrorismefinanciering. De algemene perceptie is dat Trade Finance door de toezichthouders wordt gezien als een hoog risico. Maar in hoeverre klopt dit? Ten aanzien van “Open Account” betalingen is dit in veel gevallen juist en ben ik van mening dat we juist alert moeten zijn op het hoog risico bij “Open Account” betalingen. Echter in de gesprekken die ik had met de toezichthouder werd “Documentair Betalingsverkeer” juist gekwalificeerd als een normaal risico.

Het verschil zit hem voornamelijk in de mogelijkheden om bij documentair betalingsverkeer veel meer controles te kunnen uitvoeren”, wat bij “open account” betalingen niet het geval is. Veel van de genoemde risico’s bij Trade Finance om illegale verplaatsing van gelden te maskeren zijn bij “open account” zeer hoog. Denk hierbij aan: over-facturering, onder-facturering, meerdere facturen, te weinig verscheept, teveel verscheept, opzettelijke verduistering van het type goederen en spookverschepingen.

Al deze bovengenoemde aspecten worden bij “Documentair Betalingsverkeer” veel eerder gesignaleerd omdat de fysieke handelsdocumenten uitgebreid door de banken worden gecontroleerd. In de eerder genoemde gesprekken met de toezichthouder merk ik een grote nuancering. Waar de toezichthouder spreekt over “richtlijnen” worden deze bij Compliance afdelingen vaak vertaald in eisen en regels. Banken zeggen te voldoen aan de regels (of waren het richtlijnen?) van de toezichthouder en vaak ook The Wolfsberg Group principles.
Wat is The Wolfsberg Group? Zie hieronder de beschrijving die ik op hun website heb gevonden:

“The Wolfsberg Group is an association of thirteen global banks which aims to develop frameworks and guidance for the management of financial crime risks, particularly with respect to Know Your Customer, Anti-Money Laundering and Counter Terrorist Financing policies”.

Saillant detail: Het verbaast mij dan weer wel dat een simpele Googlecheck snel laat zien dat alle van de 13 genoemde banken boetes hebben gekregen voor het niet naleven van hun eigen “principles”.

Duizenden mensen zijn inmiddels aangenomen om 99% nutteloze checks te doen omdat we wel graag die 1% duistere praktijken boven water willen halen. Daar zijn niet alleen de banken de dupe van maar ook het grootste deel van het bedrijfsleven wat te goeder trouw zijn transacties wil afwikkelen. Belangrijk is dan ook dat bij Trade Finance transacties altijd een importeur of exporteur betrokken is, die relatie is van een bank. Het is essentieel dat de bank de ondernemer én zijn onderneming én activiteiten goed begrijpt! Toezichthouders verwachten van de banken dat zij de kennis van handelstransacties kunnen vertalen naar risico’s. Een gevolg kan zijn dat banken een intensiever contact onderhouden met klanten en er meer informatie-uitwisseling zal moeten plaatsvinden. Daarnaast is het van belang dat de beoordeling van risico’s wordt gedaan aan de hand van objectieve criteria en de persoonlijke mening van beoordelaars niet de boventoon mag voeren. Dit is onethisch en onprofessioneel.

Twee voorbeelden uit de praktijk ter verduidelijking

  1. Heel jammer dat een bank een Letter of Credit transactie van een ondernemer met een Afrikaans land niet wilde faciliteren alleen op basis van het feit dat ze amper te eten hebben in dat land!
  2. Of dat de export van gebruikte vrachtauto’s naar een politiek stabiel land ook op Letter of Credit basis niet werd goedgekeurd met als reden dat deze voertuigen zouden kunnen worden omgebouwd tot militair voertuig. Dit werd slechts gebaseerd op een persoonlijke veronderstelling en getuigt bovendien van gebrek aan kennis van zaken. Temeer ook omdat de betreffende exporteur zelf gebruik maakt van een geavanceerd Compliance/AML/Sanctie systeem vergelijkbaar met wat de banken zelf ook gebruiken en zelfs goede contacten heeft met het FIU ( Financial Intelligence Unit Nederland) inzake verdachte transacties.

Dat niet alles door systemen wordt afgevangen mag dit voorbeeld duidelijk maken waarbij een Nederlandse exporteur een “Open Account” betaling ontvangt van een Duits Ingenieursbureau en zonder “red flags” op de rekening wordt geboekt. Achteraf bleek dat de betaling weliswaar uit Duitsland kwam maar dat de goederen direct naar een (dubieuze) Scheepswerf in Rusland werden getransporteerd. Het grootste risico zie ik altijd nog bij de “open account” betalingen. En door vooral in gesprek te blijven met relaties, aandacht voor de klant, weten wat er speelt en gezond verstand laten prevaleren samen met geavanceerde (Compliance/AML/Sanctie) systemen die ongebruikelijke transacties zichtbaar maken zou Compliance in mijn ogen weer ondersteunend moeten worden aan de business (klanten en producten) en niet andersom.

Conclusie

Ook ondernemers doen er goed aan om hun eigen verantwoordelijkheid te nemen en te beseffen, dat men niet meer wegkomt met een simpele Googlecheck en wat financiële data om een relatie met een nieuwe afnemer of leverancier aan te gaan. Het is voor een bank een geruststelling als de relatie aantoont dat zij zorgvuldig te werk gaat en gebruik maakt van ook voor het MKB beschikbare Compliance/AML/Sanctie software. Toegang tot deze informatie voordat je een handtekening onder een contract zet helpt niet alleen van financiële risico’s te beperken maar beschermt ook de reputatie van de ondernemer.

De internationale handel is zeker in deze uitdagende coronatijd gebaat bij een optimaal samenspel tussen de toezichthouder met duidelijke heldere richtlijnen, banken die deze vertalen naar werkbare procedures en ondernemers die de noodzaak van extra controles begrijpen en daarnaar handelen. Zo kunnen we samen ondernemend Nederland nog beter stimuleren in dat waar we van oudsher goed in zijn, succesvol handel drijven in binnen én buitenland.

 

 

Ger van Rosmalen

Trade Finance Specialist

 

 

The ultimate battle between Letter of Credit and Credit Insurance

| 28-04-2020 | Ger van Rosmalen | treasuryXL

For decades, there seems to have been a debate between using Letters of Credit (L/C) and credit insurance. Both methods offer their advantages and disadvantages. Last week, I read an article on how working with credit insurance is so much better than working with Letters of Credit, highlighting that L/Cs are labour intensive, have bad financial implications, and global trade generally prefers credit insurance. Now that some have called credit insurance the better alternative, there is further discussion about the usefulness of Letters of Credit, which raises many questions. In this blog, I highlight the contextual benefits of Letters of Credit and my opinion.

This blog is available in English and Dutch. See Dutch version below.

Scenario

Is credit insurance the fully comprehensive solution for the customer? What if the exporter has a nice deal in the so-called “emerging markets” where the credit insurance only covers 80% or no coverage at all and the importer does not want to pay because of a commercial dispute? Can the exporter afford to take a 20% deductible (residual) risk?

Benefits of Letter of Credit

If the credit insurer does not cover at all, a Letter of Credit is a very good alternative. If the transaction has a delayed payment of, for example, 180 days, it is not certain whether the exporter can wait that long for the money. Banks are no longer waiting for you at the door with a bag of money. Lending is scarce. With a confirmed L/C you don’t have to wait until the end of the payment term, but the bank can make money available when L/C compliant documents are provided. We call this “discounting without recourse”.

Customer interest

Discover the best solution for the customer and the transaction. Often you can accommodate a large part with credit insurance, but certainly not everything! If your sales area is Europe, you may still be able to avoid using L/C’s, but if you export all over the world, you cannot avoid using Letters of Credit.

Are L/Cs really that laborious and difficult?
I think you can influence that yourself. With sufficient knowledge in house, it already means that you can often sit in the director’s chair with L/C transactions. I have seen many L/C ‘s go through my hands and then I also see if you take exporters into the L/C world they find it interesting and more importantly, they will recognize the value of an L/C. The exporter feels himself with the newly acquired information comfortable to start using Letters of Credit.

Letters of Credit vs Credit Insurance

The battle between Letter of Credits and Credit Insurance has to be buried because both methods have pros and cons. Find a combination between the two that suits the needs of the customer and you will realize that both methods actually complement and reinforce each other.

 

in Dutch

De ultieme strijd tussen Letters of Credit en kredietverzekering

Al tientallen jaren lijkt er een debat te zijn geweest tussen het gebruik van Letters of Credit (L / C) en kredietverzekeringen. Beide methoden bieden hun voor- en nadelen. Vorige week las ik een artikel over hoe het werken met kredietverzekeringen zoveel beter is dan werken met Letters of Credit, waarbij er werd benadrukt dat L/C’s arbeidsintensief zijn, slechte financiële gevolgen hebben en dat de wereldhandel in het algemeen de voorkeur geeft aan kredietverzekeringen. Nu Sommigen kredietverzekeringen het betere alternatief noemen, wordt er verder gediscussieerd over het nut van Letter of Credit, waarbij veel vragen naar boven komen. In deze blog belicht ik de contextuele voordelen van Letter of Credit en mijn mening.

Scenario

Is een kredietverzekering de allesomvattende oplossing voor de klant? Wat als die exporteur een mooie deal heeft in de zogenaamde “emerging markets” waar de kredietverzekering slechts 80% of helemaal niet dekt en de importeur niet wil betalen vanwege een commercieel geschil? Kan de exporteur het zich veroorloven om een ​​aftrekbaar (rest) risico van 20% te nemen?

Voordelen van Letter of Credit

Als de kredietverzekeraar helemaal niet dekt, is een Letter of Credit een goed alternatief. Als de transactie een vertraagde betaling heeft van bijvoorbeeld 180 dagen is het niet zeker of de exporteur zo lang kan wachten op het geld. Banken wachten niet langer op je voor de deur met een zak geld. Kredietverlening is schaars. Met een bevestigde L/C hoeft u niet te wachten tot het einde van de looptijd, maar de bank kan geld beschikbaar stellen wanneer er L/C-conforme documenten aangeboden worden. We noemen dit ‘discounting without recourse’.

Klantbelang

Ontdek de beste oplossing voor de klant en de transactie. Vaak kunt u met een kredietverzekering een groot deel onderbrengen, maar zeker niet alles! Als uw verkoopgebied Europa is, kunt u misschien nog vermijden om L/C’s te gebruiken, maar als u over de hele wereld exporteert, kunt u het gebruik van Letters of Credit niet vermijden.

Zijn L/C’s echt zo bewerkelijk en moeilijk?
Ik denk dat je dat zelf kunt beïnvloeden. Met voldoende kennis in huis betekent het al dat je bij L/C transacties vaak op de regisseursstoel kunt zitten. Zelf heb ik veel L/C’s door mijn handen zien gaan en dan zie ik ook als je exporteurs meeneemt naar de L/C-wereld ze het interessant gaan vinden en nog belangrijker, ze gaan de waarde inzien van een L/C. De exporteur voelt zich met de opgedane kennis comfortabel genoeg om ermee aan de slag te gaan.

Letters of Credit vs Credit Insurance

De strijdbijl tussen Letter of Credit en Credit Insurance moet worden begraven, omdat beide methoden voor- en nadelen vertonen. Zoek een combinatie tussen beide die past bij de behoefte van de klant en u zult zich realiseren dat beide methoden elkaar daadwerkelijk aanvullen en versterken.

 

 

Ger van Rosmalen

Trade Finance Specialist

 

 

Be careful what you wish for in crowdfunding

| 02-07-2019 | by Pieter de Kiewit |

Over the last decade bankers have taken over from civil servants and public transport employees as the ones to complain about. Yours truly is also guilty and I still meet bankers who do not like to talk about their profession because they are annoyed about the bashing. Nobody is perfect but haven’t we all been too harsh on bankers?

This question popped up last week when I read about crowdfunding developments. This relatively new form of funding is growing quickly. I see at least three obvious reasons for this. First, regular banks are reluctant to fund SMEs. Regulatory requirements, ROI and risk profiles of their potential clients are some reasons for that. Second, there is a lot of liquidity in the market and it is hard to make proper investments. Third and last, various platforms, with easy accessible IT solutions, facilitate investors finding those who need funds. Why my plea to go easier on the bankers?

With crowdfunding platforms building a track record, issues are becoming very visible. There are two very prominent problems. Many SMEs using crowdfunding facilitate the payment of extremely high interests, the term loan sharks already came up. The other prominent problem is that the credit risk process in crowdfunding is often very weak. This results in the funding of unstable businesses and weak plans, ending up with funders empty-handed.

I am a small business owner, the chamber of commerce sells my address to whoever pays. On a very regular basis I receive mail informing me how much I can borrow. Crowdfunding is not regulated like banks are. Process and expectation management is being done quite aggressively by platforms and I understand problems are becoming obvious as the market matures. I invite you to read input from Lex van Teeffelen and others:

RTL Z/ANP: Failliet door crowdfunding: ‘Hoge rentes nekken ondernemers’
Lex van Teefelen: Dalend rendement crowdfunding 2019 / Flitskrediet: meer vloek dan zegen! 

This brings me back to where I started with: were we right in bashing bankers? Their processes are more sound, their communication is done with more restraint. There were extremes, mistakes were made and greed was obvious. I think most bankers tried and try to do an honest and professional job. Let’s keep each other informed, educated and ask before we judge. Hopefully we will get better in doing a proper funding job.

 

 

 

Pieter de Kiewit
Owner Treasurer Search