Audrey Zuck, director at A2Z Risk Services, calls on the market to help demonstrate to regulators that non-payment insurance deserves proper recognition as an effective credit risk mitigant. 


Earlier this year, insurers and bankers heaved a sigh of relief at the positive acknowledgement of credit insurance expressed in the Prudential Regulation Authority (PRA)’s policy statement (PS 8/19). As noted in a previous GTR article, the PRA policy statement provided more helpful clarification on credit insurance as a credit risk mitigation (CRM) tool. However, regulation does not stand still: advocates of credit insurance as effective credit risk mitigation are now focused on discussions with the European Banking Authority (EBA) and the European Commission and its advisors, who are drafting the rules and regulations finalising the implementation of Basel III in Europe. And we need your support.

A quick recap of what’s been happening: in February 2019, the European Banking Authority launched a consultation on its Guidelines on Credit Risk Mitigation, focusing on the advanced internal rating-based (A-IRB) approach. The concomitant hearing held in April had a large attendance by banks and members of the insurance community, who directed much of the dialogue towards the usage and treatment of credit insurance, which the European Banking Authority has acknowledged as having a similar economic effect to a guarantee under the Credit Requirements Regulation.

Submissions responding to the consultation addressed a number of issues raised by the guidelines and their potential impact on the use of non-payment insurance. A primary concern was on the new requirement to treat exposures guaranteed by an entity under the same approach that the institution applies for direct exposures (ie direct lending) to that entity. Using a variety of supporting evidence from rating agency methodologies, Solvency II and supervisory requirements for insurers, the case was made that this is not appropriate for exposures of the bank as policyholder to insurance companies, ie where the guarantee is in the form of a non-payment insurance policy. On the contrary, the guidelines should differentiate between the privileged position a bank enjoys as policyholder compared to a bank’s rights as unsecured creditor. Rating agencies reflect this privileged position in Financial Strength Ratings, often several notches better than the Unsecured Credit Ratings, supported by regulated, ring-fenced, assets and capital as enshrined in law (Solvency II and equivalent protections in non-EU jurisdictions). All of which is given in support for better loss given default (LGD) treatment of insurance companies where banks are policyholder.

Elsewhere, the European Banking Authority in August 2019 responded to the European Commission’s Call for Advice on the impact and implementation of the finalised Basel III standards, which addressed, inter alia, revising standards in the areas of credit risk. Following receipt of the advice, the European Commission in October issued its own consultation to further inform its drafting for final implementation of Basel III in Europe, with the draft expected to be issued mid-2020. Amongst the 210 questions asked in the consultation there are references to CRM and unfunded credit protection: this is another opportunity for stakeholders to reinforce to regulators not only the significant role non-payment insurance plays in facilitating financing of global economic activity, but also the effectiveness of its credit risk mitigation, including benefits not offered by other CRM tools, including flexibility, global reach, stability and lack of correlation.

Insurers, bound by sound risk management enshrined in regulation (under the Solvency II Directives in Europe and in equivalent protections for policyholders in other jurisdictions), represent an excellent and valued source of security. Insurers providing non-payment insurance to banks offer strong financial strength ratings, diverse risk and are established in jurisdictions with sound and established legal rules and where judgments can be enforced. Coupled with proven claims handling and payment performance and a sophisticated, meticulous approach to risk management in the underwriting process, non-payment insurance is the CRM tool of choice for many internationally active banks, particularly in Europe.

Non-payment insurance is critical to ensure bank lending continues, both in developed markets, by allowing banks to increase their lending to established clients where credit limits are reached, but also in geographies and for transactions types where other CRM tools are limited or unavailable, such as most developing countries, complex transactions, and unrated obligors.

It is a key support for exports and industrial activity beyond traditional trade receivables activities: insurance for project and asset finance, not to mention new areas such as renewable energy, has supported additional financing. In one such example, preliminary data from a Lloyd’s Market Association/International Underwriter Association survey of leading insurers and brokers of “transactional” or single-situation non-payment insurance in 2019 showed that every US$1 of insurance supported on average US$17 in bank facilities financing economic activity. The survey results were affirmed by preliminary data from the whole-turnover, or receivables portfolio credit insurance, market which showed a similar multiplier effect. Efforts are underway to provide more of this type of data.

The preliminary data also substantiated that non-payment insurance is a valuable tool, supporting bank lending in emerging markets and for transactions where credit default swaps and other CRM tools are limited or unavailable. Roughly two-thirds of the non-payment insurance registered on the survey was to exposures in emerging markets, with 26% of support provided in Africa, for example, where banks have little or no recourse to other private sector risk transfer tools.

If non-payment insurance is to work effectively as CRM, it must be not only an eligible tool – meeting the operational requirements as set out under the Capital Requirement Regulation (CRR) – but also an efficient tool: a cost-effective means for financial institutions to mitigate their credit risk. It is unfortunate that the regulations, as currently drafted, neither explicitly address credit insurance and its unique characteristics nor acknowledge the unique strengths of insurers for policyholder banks. However, this is a battle for another day.

For today, we ask this: if non-payment insurance is a valuable tool for your business – whether to obtain financing with your relationship banks, to manage credit limits and increase your financing of key customer relationships, or as support for exports, investments, or day-to-day working capital requirements – please make your voices heard. Now is the time to talk to regulators about the benefits of non-payment insurance, and to provide data to show the quantum of support that insurance provides for financing, both in Europe and globally.

As a start, contact your industry associations to find out what they are doing and how you can support their efforts; speak to your national regulators to help them understand how non-payment insurance supports your lending, trading and exporting; and respond to the European Commission consultation (