Growth in the use of credit insurance by banks has stalled for the first time since the Covid-19 pandemic, in what industry experts say may be an early indication of the impact of Basel capital reforms in the EU and Asia.
Total exposure covered by credit insurance stood at US$191.5bn in June last year, up only a fraction on the US$191bn at the end of 2024, according to a survey of 46 banks carried out by industry group the International Association of Credit Portfolio Managers (IACPM).
The finding ends a strong run of growth in the sector. Insured exposure had been growing steadily every year since dipping to US$126bn in 2021.
The transaction amount facilitated by credit insurance policies also fell for the first time since 2021, from US$455bn in 2024 to US$440bn in June last year.
New capital requirement regulations came into effect at the beginning of last year in the EU, whose lenders are by far the biggest users of credit insurance. The changes meant that banks enjoy less capital relief when they apply the product to lending.
Similar reforms were introduced earlier in markets such as Australia and Japan, as part of regulators’ adoption of the Basel 3.1 (also known as Basel 4) package of reforms.
Banks responding to the IACPM survey, which was conducted in collaboration with the International Trade and Forfaiting Association (ITFA), reported that low capital relief from credit insurance had become a bigger obstacle to taking out policies.
The lenders ranked its weighting as an obstacle at 1.51 out of 3, compared to 0.85 in the last survey, conducted in 2023.
“The banks that have been using credit risk mitigation are still using it, but for different purposes and to a lesser extent, and that is purely the result of the European legislation,” said Richard Wulff, executive director of the International Credit Insurance & Surety Association.
Jean-Maurice Elkouby, a member of ITFA’s insurance committee, said of the findings: “It’s a bit early days to conclude, really, but it was on such a strong growth path, it seems that it’s linked to that [Basel]. And we know anecdotally that large banks have changed their buying behaviour.”
The Basel reforms mainly affected large banks that use the internal ratings-based credit risk approach, compared to those that use the simpler standardised approach (SA).
“The market didn’t fall off a cliff, because there are still new entrants,” Elkouby told GTR. “But it’s mostly SA banks that still find it attractive under SA to do these things, but under [internal ratings-based], we’re feeling the pinch.”
Charlie Radcliffe, chief commercial officer at specialised broker BPL, said the capital reforms have “made credit insurance less attractive for certain large banks having used credit insurance for management of risk-weighted assets, even where the underlying risk transfer has not changed”.
But he added that the survey results “do not fully reflect activity among newer users (mostly following the standardised approach) or the growth we continue to see in more complex, higher-priced transactions”.
Chris Hall, head of financial institution sales at broker WTW, said smaller banks “are also much, much more alert for using credit risk insurance as a form of syndication to help them achieve bigger ticket sizes, be more relevant in the lenders waterfall, and ultimately be get more from their clients”.
He said pricing pressure on banks’ lending pricing may have also dampened credit insurance appetite during the survey period.
“I think pricing has come in, and I think that it’s not stopping business, but it’s meaning that people are having to be more thoughtful,” he said.
Alongside trade finance exposures, the main assets covered by credit insurance in 2024 were project finance debt, as well as revolving credit facilities and term loans extended to large corporates, the survey showed.
Despite the regulatory shift, just under a quarter of the surveyed banks said obtaining regulatory capital relief was their “primary goal” in paying for insurance cover, a slightly higher number than in the last survey. Freeing up lending capacity remains the most commonly cited reason for using the product.
Credit insurance is one of several methods banks can use to offload risk and free up capital. In Asia-Pacific, it is the most popular risk mitigation tool, according to the survey, while in Europe and the Middle East it ranks second after loan sales and syndications, and alongside synthetic risk transfers.
Som-lok Leung, IACPM executive director, told GTR that banks recently obtaining policies for the first time, as well as new underwriters entering the market, both bode well for the product’s future.
“The use of credit risk insurance continues to have a lot of interest. We would expect it to continue to expand, even though for some banks, given the less efficient treatment, they will use it less compared to other tools.”
More favourable treatment of credit insurance in the US, where regulators are currently reformulating their implementation of Basel 3.1 after an abortive attempt during the Biden administration, would also be a boon to the sector.
