The volume of insured business of the shariah-compliant export credit insurance programme, which is managed by the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), is expected to double to $2 billion (Dh7.3bn) this year as more businesses recognise the importance of hedging credit risks.
While the volume of their business may have shrunk by nearly 30 per cent from $1.4bn in 2008 to $1bn in 2009 – due to the inability of policyholders to finance their exports as a result of the global financial meltdown – ICIEC Chief Executive Officer Dr Abdel-Rahman El Tayeb Taha says, however, that the volume of insured businesses in the first quarter of 2010 alone increased dramatically by 77 per cent.
“After the crisis, businesses started to realise that insurance is not only useful, but also serves as an effective tool in helping them manage credit risks,” says Dr Taha.
The ICIEC’s expected $2bn insured business is part of a $1.3 trillion global export credit and political risk insurance industry, which is managed by around 50 international members of the Berne Union – an association of credit and political risk insurers that work towards promoting stability in cross-border trade.
In 2009, the Jeddah-based ICIEC, which is also a member of the Islamic Development Bank (IDB) Group, paid a total of $1.6m in compensation. Taha says the figure is considered relatively manageable, especially since the agency is not expecting any surge in claims this year.
He also took note of the ICIEC’s impressive track record in recovering the claims paid.
“On the average, we are able to recover about 50 per cent of what we pay, which is considered good by industry standards,” he said.
In an interview with Alrroya.com, the ICIEC chief disclosed that most of their businesses originate from member countries in the Middle East, particularly Saudi Arabia, UAE and Bahrain. However, its worldwide coverage spans a total of 39 Islamic countries such as Bangladesh, Indonesia, Kazakhstan, Malaysia, Pakistan, North African and Sub-Saharan countries, as well as Turkey, to name a few.
ICIEC, which recently opened an office at the Dubai International Financial Centre, is also undeterred by the ongoing debt restructuring in Dubai government-related firms. Taha was quick to point out that the Dubai debt issue poses no threat to their operations in the Middle East region.
“The problem in Dubai has been mainly focused on real estate. Fortunately, we do not have any exposure to that sector. Also, we believe that the restructuring of the Dubai World and Nakheel debts is in place and we could expect things to come back to normal,” he said.
Insuring foreign trade from country risks
Cross-border investing has been a mutually benefitting and financially-integrating venture for many countries worldwide. However, various dynamics could put these investments at risk, making it essential (if not crucial) for companies to insure their assets from potential losses.
“In examining investment opportunities abroad, prospective investors focus not only on profitability, but are also concerned with non-commercial risks related to the host countries. These are risks that the investor normally cannot do anything to mitigate,” ICIEC mentioned in its brochure.
Dr Taha explained that there are three standard country risks that ICIEC covers. First is the risk of war and political unrest, where investors are compensated for any loss resulting from civil war or military action in the host country; second is the risk of nationalisation or confiscation of the investment, where the host government takes action in seizing the assets.
Finally, ICIEC provides coverage for risks related to foreign exchange transfer or the inability to convert local currency into an international currency or transfer the money outside the host country.
ICIEC influence goes beyond the role as insurer
According to Taha, one of the means of mitigating risks is through mediation – a task that ICIEC has been doing over the past 15 years of its operations.
“Our presence as an insurer of a member country’s risk could act as a deterrent for stopping a risk from taking place. Some foreign companies, who may not necessarily need our insurance since they can get it from other international insurers, may opt to have us as part of the insurance consortium because of our relationship with the host countries,” he said.
In many cases, he explained, ICIEC’s intervention has prevented claims from being submitted as the concerned parties were able to discuss and resolve the issue before it becomes a full-blown problem.
“So far, we have not paid any claims for a country risk, for example, not because this risk does not exist, but because we as a multilateral agency have the ability through our relationship with member countries’ governments to [mediate] and solve a problem before a claim is submitted. Especially since, in many cases, the reason why an investor was not able to transfer money [for instance] from a local to an international currency is purely administrative,” explains Taha.
He added that once a similar concern has been brought to their attention, they act as a go-between that helps the investor and the host country’s central bank to amicably discuss and solve the problem.
Consider also reading:
Europe crisis sparks risk aversion: Trafigura
Dubai World doubts weigh on debt insurance costs
Islamic insurance debates over fund deficits
Dubai debt insurance costs rise amid funding doubts
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