GTR and WTW gathered a group of expert bankers and underwriters in late September to take stock of the most significant challenges and opportunities the insurance sector has faced during the previous 12 months, including the impact of rising interest rates, the trade finance gap and growth in the private credit fund space.


Roundtable participants:

  • Donnie DiCarlo, senior director, WTW
  • Irma Garrido, senior vice-president, business development and alliances, Banco Latinoamericano de Comercio Exterior (Bladex)
  • Gimi Giustina, (then) vice-president, Citibank
  • James Grotticelli, executive director, global transaction banking – trade finance, Mizuho
  • Jared Kotler, head of credit and political risk, The Hartford
  • Lian Phua, head of Americas, global political risk, credit and bond, AXA XL
  • Daniel Sussman, president, credit division, Crum & Forster
  • Andrew van den Born, managing director, global head of CPRI for financial institutions, WTW (chair)


van den Born: The last year has seen continued geopolitical instability, a high inflationary environment and high interest rates. There’s also been a shift in market risk in terms of geographic breakdown – whilst the market was built on covering emerging market risk, countries such as Nigeria, Angola and Ghana no longer pose the biggest country exposures, whereas developed countries like the US and the UK now represent the largest exposures. What has your experience been over the last six months and what is the reason for this shift?

Kotler: This market is now firmly established as one that can provide relevant products for banks to use to manage their exposure around the world. 10 to 15 years ago, banks were using our products more for higher risk exposures, but now they’re seeing that they can use them in some key asset classes, such as trade, export and project finance. And those asset classes are exactly where banks want to deploy their capacity due to a market-wide flight to quality. Trade, export and project finance have historically performed extremely well.

Additionally, financial markets are increasingly focused on real assets because there’s a lot of uncertainty around the world. At the same time, there’s a demand for financing of real assets, such as renewable energy, to aid the energy transition. And banks are fully comfortable with the credit insurance product. As a result, the past 12 months have seen record deal flow for this marketplace. It’s the highest I’ve ever seen.

Phua: In terms of the flight to quality, yes, there’s perhaps less appetite for insuring risks in Africa now, while more banks are becoming happy to use the credit insurance product for structured credit and project finance. The longer tenors of a lot of the credit insurers work very well for some of these asset classes. We’ve seen a huge surge, particularly on the data centre front. A lot of them have very good, investment-grade tenants. There are also a lot of hybrid project finance transactions in the US now, whereas previously, they might have been funded off the balance sheets. For the marketplace, it’s a very good natural diversification. I expect it to continue until 2024.


van den Born: Is everyone continuing to chase the same assets? Is there a risk that there is going to be a squeeze in liquidity, given the fact that it’s all being channelled into a smaller sector of the market?

Sussman: We have seen a tremendous amount of deal flow. What’s driving that in the developed markets is growth in the number of banks that are coming to the market. We’ve seen some net new banks – buyers of the non-payment insurance product – and so we’re seeing healthy flow across what is now for us a stable of some 35 banks that have onboarded our platform, and that number is growing. In terms of the amount of carriers that are interested in sub-investment grade exposures, I think it really is very sector dependent.

At the low end, there might be a handful of four to six carriers on certain product types, and then upwards from there. But there’s no doubt that if demand for certain non-investment grade cohorts expands, there will be some capacity constraints in terms of clearing the market.

Garrido: In Latin America, as a whole, loan growth has been substantial, peaking in mid-2022 in most countries. Since then, it has been slowing down somewhat but remains robust, registering double-digit figures. At Bladex, we have increased our commercial portfolio by an average of 8% as of June, both in investment-grade and non-investment-grade countries. This is consistent with our annual guideline of upper single-digit growth and aligns with the broader macroeconomic trends.

We are part of the select group of Latin American banks that employ insurance to mitigate regional risks, with European banks being the most active users in this regard. While insurers’ capacity constraints persist in non-investment-grade countries, we have managed to expand the number of insured deals in recent years. Overall, the sentiment in the region appears quite positive, and access to liquidity remains unproblematic so far in Latin America. It is true that we are observing some initial signs of deterioration in retail and consumer loans, but local banks are effectively serving the middle segment of the market.

Sussman: There’s been a real inflection point over the past 12 months from an underwriting perspective. Whereas 18 months ago, the focus was pandemic-related issues and supply chain concerns, now we’re pivoting to inflationary and interest rate issues. It was certainly a stressed market environment 12 months ago for different reasons. Based on the current market environment, we’re re-evaluating our underwriting considerations across the board.


van den Born: We often talk about the trade finance gap, which, according to the ADB, back in 2020, was about US$1.7tn. It has now increased over the last three years to US$2.5tn. The question is, who’s going to be able to step in and provide this liquidity? How are banks supporting their clients?

Garrido: Bladex’s commercial book is approximately half trade, half non-trade, and 40% is with financial institutions (FIs). Bladex was created over 40 years ago to ensure access to cheaper trade for Latin American banks. We were listed on the New York Stock Exchange 31 years ago – today we have a 77% free-float of private investors – and have been progressively growing the corporate sector.

This said, we have a limited operating structure which makes it impossible to address the SME segment.

We focus on the large corporates and have a long-lasting relationship with our clients. We can indirectly close the gap, discounting the risk of the large buyer or seller along the supply chain, but we cannot fund the medium or low segment directly.

DiCarlo: The trade finance gap doesn’t lie in the developed markets; it lies in the emerging markets. These are deals that can’t be financed by a lot of the banks in the US and Europe. The solution I think is public-private partnerships. If you ask most multilaterals, export credit agencies and development financial institutions (DFIs) what their biggest challenge is today, it’s mobilising capital. They can only issue so many bonds to raise capital in order to lend into some of these emerging markets and developing countries. How can they mobilise capital to lend more? The answer is to team up with commercial banks, or non-bank FIs. Another solution is to partner with funded insurance providers to increase that type of flow into those countries that need it the most.

Phua: The mobilisation of capital is likely the right answer. However, it really depends on the area and region. To give an example, to fund the trade finance gap in a country such as Ukraine, you would need the multilaterals and DFIs to step up where the market can sit behind them. With respect to Latin American trade finance, there are the medium to large-sized trade players, and there’s a lot of public information about them. But for the smaller players in the trade finance area, and especially in Latin America where there are a lot of family-owned businesses, you really want to sit behind a Bladex or a big lender, who knows these companies, their trade flows and their families very well. That’s the way to mobilise interest from private credit insurers.

Kotler: The rising interest rate environment has made it very difficult. That’s one of the big reasons why the trade finance gap has increased. When you have such big spreads in the US and Europe, banks are going to put their money there, because they’ve been there a long time, and they feel very comfortable in those markets as compared to the emerging markets. But the positive side is that the banking sectors in many emerging markets are quite strong. For example, if you compare Brazilian banks in 2008 to now, it’s two different ends of the spectrum. The governments and regulators have done what they needed to do to shore up the banking sectors, and the capital adequacy ratios clearly tell that story. But if there’s not much difference in spread, banks will still go to the US, even if Latin America is strong.

We support commercial lenders throughout the US, Europe and Asia, even in some of the higher-risk jurisdictions, because of the strength of trade finance and its favourable loss experience. The financial markets need short-term funding through traditional trade finance – letters of credit and trade loans – and we can keep on helping the commercial banks with that. But these emerging market banks need longer-term financing and local currency financing as well. For those products, which I think the credit insurers are now starting to support, you do need a multilateral to get involved because of that long-term commitment. Multilateral development banks are not only looking out for the profitability of their shareholders, so they can do that.

Garrido: The challenge with the trade finance facilitation programmes is that banks need to give an important percentage of the gross margin to the multilateral, and then assume cost of funds and operating costs, which in many cases becomes dilutive, so not many institutions are able to afford it. There needs to be some other kind of incentives at the end of the road for private banks to fund the mid and lower segments at reasonable prices.

Kotler: International regulatory standards for FIs play a role here because trade finance is a capital drain. It shouldn’t necessarily be this way, because the historical loss ratio is just so gradual for these assets. But if the capital requirements are high, it’s very hard for FIs to justify large-scale support for trade finance from a return on equity perspective.

Grotticelli: It’s always been a sensitive subject because trade assets should receive beneficial treatment compared to a clean working capital facility. It is unfortunately often minimal, and both use balance sheet. Trade assets really should be treated better because, with short-term trade, recovery is certainly higher than any other asset class.


van den Born: We have seen significant growth over the last 18 months in the private credit space. We’re seeing an increase in bank leverage deals, total return swap structures, loan on loan, net asset value (NAV) and hybrid NAV, unitranche structures, term loan B structures and so forth. There is a small but growing market for these risks here in the US. These risks tend to be mostly in the US but are being driven by the European banks. What is the reason for this?

Sussman: Private credit is having a substantial and profound secular change in the marketplace, both in terms of bank appetite to seek insurance for sub-investment grade, typically senior secured exposures, both revolving credit facilities and term loans. It’s mostly the US, but also Western European-based risks. The private credit funds themselves have substantial dry powder to address middle market loan opportunities and, in some cases, certainly are very substantially encroaching on the banks’ former purview. A question for carriers, such as ourselves who have interest and appetite in gaining exposure to these markets, is: if a substantial cohort of the market is being addressed outside of a regulated bank environment, how do we get exposure to that cohort of business? We’ll have to work with the private credit funds in some dimension. That’s certainly an unanswered question being explored in certain types of structures we’re working on. Private credit funds do access bank financing through business development companies (BDCs) in the US, and so we have found there is one way at least for us to access these private credit funds’ business models through their BDC financing.


van den Born: Some insurers might view leverage as a dirty word, but these are well-structured transactions. Are the more traditional players looking to enter this space as well? Or is there a sufficient flow of the more vanilla business?

Phua: It depends on your growth ambition, but the greatest amount of activity has been in subscription finance, NAV finances, BDCs, and those from the banks, which require a different type of underwriting. You’re looking at the asset valuation and portfolio diversification, paying very close attention to loan to value and the actual underlying fund. If you’ve wrapped your head around project finance, or some of the more complex structured finance, as a private credit insurer I don’t think it’s a bad asset class to look into, especially if you look at loss history, which has been very good. I do think there will probably be more credit insurers looking to grow in that line of business over time.

Kotler: For 40 years trade and export finance was the only thing our market did. Then about 10-plus years ago, we started writing project finance. Nobody did it before and now everybody does. So there is a space for a new type of asset class to be supported by the market such as this; it comes down to structure though. It’s also a matter of whether the expertise is in your company. For The Hartford, we have trade, export and project finance as our core because we have underwriters who are experts in that. As you expand, you want to make sure that you either get experts from the analyst side or the underwriter side, or both. I think it’s just a matter of time – if people invest in it, and understand it, others will follow.


van den Born: There tends to be a lag in the market in terms of banks’ appetite for risk and that of insurers. We brought the first subscription finance transaction to market back in 2017 and we spent six months educating the market on how these structures work. Now there are 20-plus insurers willing to entertain capital calls such that these might now be considered flow business and we’re looking at the next iteration of that in net-asset value trades. Again, I think it’s going to be an education process. Would you agree with that?

Sussman: Absolutely. One of the key ways to bring the market along is the banks, which have a substantial alignment of interest with the insurers on many of these transaction types. Over the past couple of years, indemnity levels across the board for these cohorts of deals have been much lower than what we’re used to seeing. Historically, you would typically see indemnity levels as much as 90% to 95% on a wide range of business. But for new classes, it’s very attractive for insurers who are growing out their book of business to see indemnity levels at 50% or less.

DiCarlo: It’s refreshing to see the valuation of security being treated differently. Historically, the emphasis in the underwriting process was on the probability of default, which was 95% of what underwriters looked at. Now there’s a pivot to focus more on loss given defaults, which emphasises the importance of collateral, particularly in regard to non-investment-grade loans.


van den Born: The Basel III endgame standard aims to bring in sweeping reforms and significantly affect all category one to four banks in the US. It looks like the current proposals being put forward are going to deviate from the current international Basel standard framework and in many ways could be more draconian. Would these proposals have prevented the demise of the likes of Silicon Valley Bank? Will these proposals, unless they’re watered down, make US banks less competitive than their European counterparts?

Giustina: Early in my career, I got a book from our treasury department, and the key phrase I remember is, “no bank ever failed for lack of capital, they failed for the lack of liquidity”. But we still have a lot of focus from the Bank for International Settlements and everybody else on capital. To answer your first question, no, I don’t think so.

Kotler: The liquidity issue is a great point. From our standpoint, when interest rates are raised 500 basis points, something’s going to break. The stress we saw at regional lenders in the US is what broke. With regard to the regulation, there are arguments for and against. But one thing that’s interesting is when you tighten capital standards for banks, you take the froth out of the system, and I wonder if this is the actual end game, not whether that’s actually good for the banking system, or whether it’s good for the wider economy.

Garrido: Perhaps the question is understanding why there is a lack of dialogue. Because there’s always a cross-border element – US banks are funding many European interests and vice versa. What is the goal of raising capital without a real risk assessment behind it? Being under-capitalised is as bad as being over-capitalised from an investor’s return point of view. At a systemic level, why is there this lack of communication between the regulatory bodies? And what are the interests behind it?

Kotler: It chimes with what’s going on geopolitically. If we can’t agree on trade or banking regulations, there will be more and more fragmentation.

Sussman: Over the next couple of years, there may well be some ability for US banks to get regulatory capital relief from the non-payment insurance product. Our market is sized for the cohort of banks that are currently buying our products and you could see potentially a landscape change. What happens then? Does that open up the floodgates? Can we be a meaningful participant in those markets as they evolve? I think there’ll be a lot of stress on the current capacity.


van den Born: For the last two or three years, everyone has been talking about when this tsunami of claims will hit, but it simply hasn’t materialised, even though we’ve had a number of notable sovereign defaults like Zambia, Sri Lanka and Ghana, and an increase in notifications and restructurings. Are we right to say the threat is over, and if so, why?

Kotler: One of the things that that kept the market from the tsunami of claims was government support during the pandemic, but this created another problem, which is inflation. I think it’s just going to manifest itself in a different way. We thought the Covid-19 pandemic-induced recession was going to be a widespread credit event due to liquidity issues, with multiple companies not being able to raise funds. Instead, they all got funds at very low interest rates on their 10, 15, 20-year money. Pivoting to a large section of the credit insurance market, project finance, inflation will create issues. This is because inflation throws all your analysis out the window, even though you think about stress scenarios when underwriting these transactions. If inflation doesn’t get under control in the US, the question is, will we have trouble in the US and Europe with regard to some of these project finance exposures?

Phua: In project finance, I think we’re going to see some stress scenarios. As an example, many renewable projects have come online in Latin America over the last few years, in certain countries where they might not have the existing power infrastructure to handle the increased supply of power. It is kicking the can down the road – restructuring a little bit, giving the sponsor some time to fix the technical issues, and hoping the government steps up to support the projects.

Kotler: The market watches and adapts. In 2014 it exited Russia, which used to be one of the highest exposures for the marketplace. So when the war hit in 2022, the market didn’t have the exposure it used to have. Now the marketplace is in all these different asset classes, from leveraged finance to export finance. On the positive side, given the diversification of each insurer’s book, if a tsunami comes, we’ll be able to handle it.


van den Born: Particularly in the private credit space, debt is typically financed using a floating interest rate. Is that going to dampen the demand for more leveraged deals?

Sussman: Statistically, there is no doubt going to be an increase in defaults over the next couple of years. What does that mean for the insurance markets? It’s still unclear because the insured penetration in many of these types of risks is still relatively thin. It’s early days. People talk about the refi wave and when that is going to occur over the next couple of years. What happens with companies whose business model is too stressed from margin compression and interest rate costs? Can they attract refinancing? Some will fall over, but having said that, US$1.5tn of capital has been raised to support the private credit marketplace; many of them for a price will achieve some refinancing, both from that sector of support, as well as from the banks themselves. One of the open questions that we spend time thinking about is the loss given default over the next turn of the cycle. Perhaps there’ll be an increase in default, and how effective will recoveries and restructurings be over the next couple of years? A large portion of the risks that might be insured in the markets that we’re discussing are senior secured, so there’s the full expectation that there will be a healthy recovery; but whether that is at levels that heretofore have been modelled or not remains to be seen.


van den Born: Looking forward to the next 12 months, what sort of themes can we expect to see?

Garrido: Everyone was expecting a US recession around 2023, which hasn’t happened. Interest rates keep going up and inflation is still there. I am personally a little bit worried about the real estate sector in some areas. Latin America mirrors the US – if the US is in bad shape, everywhere else is in even worse shape. If interest rates moderate and there is a slow adjustment of GDP in the US, I would say 2024 should be similar to 2023.

Kotler: A normal, natural recession hasn’t happened in a very long time. The financial crisis and Covid weren’t normal recessions, they were crises. To figure out what that normal recession would look like after 23 years is very hard to do. Where are the stress points in the economy? Real estate is definitely something we see as a potential pain point, but can there be a soft landing? The positive part of it all is that the US economy has actually been able to pick itself back up quite quickly in periods of stress historically.

Sussman: Looking out into the next 12 months, we know for sure whatever we are thinking today is going to be wrong. What I am fairly confident about, however, is the health of the non-payment insurance market. I expect very healthy demand for our risk management and regulatory capital relief products.

Kotler: Each market has its own niches, but I think the overriding thing for the overall market is that we’ve developed partnerships with all of our clients and we’re going to work together to figure out how to restructure and work through this. It’s not just a financial product, it’s a partnership. That’s a big mitigant for the industry’s long-term survival – we’re in it together.

Garrido: There’s one thing that I’ve learned and that’s the word ‘relationship’ for the insured and insurer. Even if you think something is unimportant, for the insurer, it is important. Even if it’s good news – share that too. Having said that, once insurers do their due diligence and know how the decisions are taken from a credit perspective and understand the bank’s methodology, the insurance underwriters should rely on these guys.

Grotticelli: Insurance should be used as a mitigating tool to get banks to the next level or tier, and not as a means to dump weaker credits onto insurers. Insurers are not only providing a necessary risk mitigation and risk capital tool to banks, but should be viewed as partners.

van den Born: It’s the old adage: insurance doesn’t make a bad risk a good risk.

Garrido: Insurance is just an enhancer, never a cleaner.


The statements and opinions made by the contributors of the roundtable discussion are those of the relevant individuals and do not necessarily represent the views of WTW. WTW is not responsible for the accuracy or completeness of the third-party views contained in this article.

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