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The International Trade and Forfaiting Association (ITFA) has released a harmonised Basel III-compliant trade credit insurance policy form to help banks and insurers negotiate deals.

The initiative, a collaborative industry effort involving more than 40 insurers, brokers, banks and law firms, is the “first step of many in a direction to further standardise a Basel III trade credit policy”, says ITFA chair Sean Edwards.

The form is designed primarily to cover receivables policies and is based on an original policy form developed by brokerage firm Willis Towers Watson.

The project, which has been underway since October 2018, was initially launched as the Basel III Think Tank Initiative, spearheaded by Scott Ettien, executive vice-president at Willis Towers Watson.

Banks frequently make use of insurance in trade finance transactions to increase their risk capacity and obtain capital relief on their transactions. However, the process is often complicated by the fact that banks and insurers each have their own unique Basel III policy forms.

ITFA’s initiative aims to create more insurable opportunities while at the same time saving legal costs and time.

At the time of the launch, Ettien told GTR that the project was an opportunity for the industry to “put the wording to the side and open up capacity for the market”.

Ettien announced the release of the new policy wording during a session at the ITFA annual conference in Bristol, UK, on October 8.

“Banks and insurers have held tight to their own negotiated form,” says Ettien. “All negotiated forms are confidential, so comparison is difficult. Countless hours are spent negotiating forms, with most of these, if not all, landing on similar wording. These protracted negotiations are expensive and time-consuming and frustrate all parties, especially the bank customer seeking advantageous balance sheet treatment.”

Harmonised wording will allow banks to focus on capacity and pricing, and the insurance carriers to differentiate themselves with service and ratings rather than on a policy wording nuance.

Policy standardisation will also bolster the trade credit industry’s approach to capital relief.

“Consistency, predictability and a reliable form is paramount to regulatory bodies further recognising trade credit insurance as a viable risk transfer mechanism for capital substitution,” says Edwards. “We need all banks, insurance companies, law firms and brokers moving in the same direction if we are to grow the overall industry.”

Nevertheless, as Ettien pointed out in his presentation in Bristol, the new form stops short of “a true standard Basel III policy”, which the parties believe will “never exist” given the nuances of individual deals. “However, the exclusions, terms, and conditions of each policy should remain consistent with variation for the transaction details.”

The wording, together with a guidance document co-authored by law firms Sullivan and Clifford Chance to help streamline final policy negotiations, is being published on the ITFA website.

The group will now focus on policy wording for the US market, with that form expected to be released later this year.