Challenges in risk assessment
Swiss Export Risk Insurance SERV plays a central role in covering export transactions against payment defaults on economic or political grounds. The job of SERV’s expert credit analysts is to evaluate the risks in detail, without jeopardising the financial stability and economic viability of export credit insurance.
In an increasingly volatile global environment, prudent and rigorous risk management is becoming more important. This is not just to cover individual export transactions, but also to fulfil SERV’s overarching promotional mandate: to support Swiss export trade by insuring targeted non-marketable risks. Thomas Schudel is Head of Risk Analysis and Sustainability at SERV. In this interview, he sheds light on SERV’s credit analysis activities and explains the challenges encountered in assessing risks.
Credit risk – the art of good judgement
A creditworthiness assessment of foreign buyers is fundamental to any decision by SERV to assume risk. That means making a balanced assessment. While the premium level for all insurance must be high enough to cover all defaults and SERV’s costs, premiums should not be overly high to the point where they might jeopardise viable transactions that would merit promotion.
SERV applies the principle of economic viability, which means that risks must be neither underestimated nor overestimated. If a risk assessment is fundamentally too optimistic, overly low premiums could endanger the financial basis on which SERV operates. However, excessive caution can push premiums up too high, in a worst-case scenario preventing the export transaction from going ahead.
Evaluating risks is particularly challenging in politically or economically unstable countries. These markets are often shunned by private credit insurers, usually leaving SERV as the only possible insurance provider. SERV covers non-marketable risks and operates in a subsidiary capacity to the private insurance market.
“Companies generally apply for cover from SERV when they themselves identify a heightened risk. This means that SERV’s portfolio tends to contain a concentration of challenging cases,” explains risk expert Thomas Schudel. He stresses that this specific set of circumstances makes it vital for SERV to undertake particularly diligent scrutiny of projects and of debtors’ creditworthiness.
Country risk – assessing political and economic operating conditions
“Another central element in our risk assessment is the evaluation of country risks. That forms the basis for pretty much every analysis,” stresses Schudel. Political unrest, economic instability, controls on capital movements and international sanctions can result in defaults even by buyers with inherently good credit quality.
SERV creates its country risk classifications by applying a broad array of macroeconomic indicators, past experience of payments and qualitative analysis. The country classification – from negligible to very high risk – serves as the basis for defining cover potential, premium levels and any restrictions.
These classifications are regularly reviewed and adapted to take account of geopolitical developments. In combination with the individual analysis of each export transaction, the country risk classification enables a differentiated and appropriate assessment of the risks of export transactions – even for economically or politically challenging target markets.
Portfolio management – limiting risks in accordance with the market environment
The structure of SERV’s portfolio largely mirrors that of the Swiss export market. SERV’s activities follow those of the Swiss export industry, with the result that the portfolio structure is in line with conditions in the real economy.
In practice, being led by the market in this way produces a focus on certain countries, regions and sectors. “Risk concentrations like these harbour the danger that external shocks – such as political crises, economic slumps or natural disasters – could have an outsized influence on the portfolio as a whole,” explains Schudel.
In order to limit these risks, SERV applies internal thresholds, determining the permitted extent of exposure to certain countries and to individual debtors.
Risk management enables potential risk clusters to be identified at an early stage. If necessary, measures such as more restrictive cover policies or temporary restrictions on writing new business can then be put into place.
Risk management – sustainable export promotion through in-depth analysis
“Our credit analysis is shaped by the constant quest for the right balance,” concludes Schudel. “We have to make a realistic assessment of the risks and at the same time support the competitiveness of the Swiss export industry.”
This balancing act requires considerable expertise and a methodical approach. It is only through painstaking case-by-case scrutiny, a consistent country risk policy and portfolio management that SERV is able to fulfil its mandate sustainably and over the long term.
Effective risk management not only contributes to SERV’s stability, but also strengthens Switzerland as an export location across the board. SERV thus makes a valuable contribution to upholding the international competitiveness of Swiss businesses, particularly in economically or politically challenging times.
