The credit insurance market is edging towards a standardised approach to policy wordings, driven by the efforts of industry associations keen to foster market growth. Still, more work may be needed to convince some players about the benefits of the use of standard documentation as a practical starting point for policy negotiations.


In August 2022, the Loan Market Association (LMA) published a credit risk insurance policy model form – its first such document for the insurance market, and one that had been years in the making. The template, which the LMA says has been drafted for insuring single borrower credit risk arising from a loan agreement and in keeping with the capital requirements regulation (CRR) for unfunded credit protection, was hailed as a milestone for the wider industry.

Nevertheless, it was not the first time the notion of a standardised approach to policy wording had been put forward. The International Trade and Forfaiting Association’s (ITFA) insurance committee’s first piece of work on market standards came in 2016 in the form of guidelines on the use of CRR-compliant non-payment insurance policies, which were revised in 2019.

That same year it produced a master risk participation agreement for use in unfunded participations in a variety of trade finance transactions involving documents like guarantees and surety bonds.

More recently, in 2021, ITFA released a harmonised trade credit insurance policy form, designed primarily to cover multi-buyer trade receivables finance but which ITFA says provides terms and conditions that may have application for other bank products and transactions.

While the concept of standardised policy wordings has largely been welcomed by the market, particularly for the advantages that they bring for new participants, there has been hesitancy from some established players who fear they might undermine their competitive advantage. GTR speaks to Sian Aspinall, CEO of BPL Global, involved in the projects with both ITFA and the LMA, and Audrey Zuck, director of A2Z Risk Services, who co-ordinated the LMA’s insurance input, to learn more about the drafting process and expected take-up.


GTR: How do ITFA’s and the LMA’s approaches to standardised policy wordings differ?

Zuck: It’s my understanding that ITFA’s wording was produced specifically for multi-buyer trade receivables as purchased by banks, whereas for the LMA the starting point was plain vanilla loans – bank loans to single obligors. So they’re very different and don’t overlap.


GTR: What are industry associations trying to achieve by producing standardised policy wordings?

Aspinall: This work is being done to validate and demystify credit insurance as a risk mitigation tool and to make it more accessible, which is crucial to the expansion of the market.

Moreover, it gives market participants, both banks and insurers, a good starting position for policy negotiations. By making use of documentation from well-respected industry associations, parties know they’re not being disadvantaged.

Having this base and lowering the time needed to negotiate wordings also reduces the legal costs and barriers to entry.

Zuck: In the case of the LMA, the primary objective is to provide a good starting point for new bank entrants – those not a customary user of the product – to make them feel more confident that what they are using is an industry standard. It’s designed to be a market-accepted product that should overcome what has traditionally been a very big hurdle for new participants.

It’s important to remember that this is a point of departure and that it can and should be tailored according to the outcome of commercial negotiations between individual parties to reach a mutual landing position.


GTR: Which parties benefit the most from a standardised approach?

Aspinall: Established bank users of credit insurance are going to stick to their policy templates, and there’s going to be very little will or pressure to do otherwise. However, the biggest benefit is for new market players who don’t have those established positions. It gives them a benchmark and opens up their horizons to new possibilities of usage. It also creates credibility within their organisations to get the product approved.

The hope is that the market will expand, capacity will increase and portfolios will become more diversified – these are benefits to all players in the market.

Zuck: The LMA’s introduction to its wording specifically says that its documentation is designed for new market entrants – those who need to get comfortable in starting negotiations and with onboarding the product.

As it has already benefited from significant scrutiny and negotiation as part of the LMA’s process, it should also be helpful for getting legal, credit or risk management sign-off.


GTR: What has been the response from all parties – brokers, insurers and banks – to the LMA’s policy form?

Aspinall: When you start out looking at any process like this, there’s always an element of nervousness and cynicism from various stakeholders, primarily because people fear that things will be driven to a lowest common denominator and be to their disadvantage. But parties are coming to realise that there’s a greater good and that the more established the market is, the easier it is to grow and the more credibility it has.

From a bank’s perspective, the fear was from existing users, generally seasoned professionals who have their own highly negotiated template wordings. Their concern was that all that work would be undermined.

Then there was doubt on the insurers’ side that the form would be a ‘cherry pick’ of all the best terms across all the different wordings and they would find themselves in a position of being presented with a fait accompli.

The reason this was a protracted negotiation with the LMA was that both sides had a lot to say. We’ve landed on an approach that balances all perspectives and we’ve made it clear that existing positions will be respected.

The drafting of market policies has historically been broker-led, and for that community there was a fear regarding disintermediation and where that leaves the broker. I’m not sure yet if brokers have got their heads around these concerns.

A broker’s role is far broader than only negotiating wording. If they’re doing their job effectively by canvassing the wider market and discussing placement strategies with a client determining optionality within that wording, then they shouldn’t be threatened by this.

Zuck: What’s also recently developed in the market is banks having different wordings with different insurers. Therefore, not all insurers are on the same wording basis. This isn’t a good idea because you have potential inconsistency in approach and don’t have consensus with regard to a claims situation.

Hopefully, new entrants using this product will be able to put all of their insurers on a particular loan exposure on the same basis, which will make the claims process much less complex.


GTR: Are there some instances or markets where standardised wordings are potentially less applicable?

Zuck: Standard wording should be applicable anywhere, whether it be a developed or developing market, a highly structured loan or a very straightforward loan, just tailored appropriately to the asset covered.

I hope because these are very common terms and conditions, tailored only with regard to commercial points, that this should allow the new banks to have all of their underwriters on the same basis. That is incredibly important for consistency of approach if nothing else.


GTR: Why is this an important development in the current context?

Aspinall: This is key in the current banking regulatory domain as the European Union, and the various member states as well as other nations, finalise and transpose Basel III into their own regulation. As they do so, we need credit insurance to be recognised in its own right as a valid credit risk mitigant. Before, it was lumped in with the wider unfunded guarantee definition. We need recognition from regulators that it has its own features and benefits.

Standardisation is one of the ways to demonstrate that, because if you can’t say something has clear parameters, then how can you measure its efficiency and eligibility?