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Non-Payment Insurance for Banks

Private market Comprehensive Credit and Political Risk Insurance policies are a tried and tested form of risk distribution for banks.  Policies can be used to provide capital relief, leveraging credit limits to increase lending capacity. While policies can often be assigned if a debt is sold, insured debts are usually held as the insured bank can retain some of the margin, maintain customer relationships and market position as well as not revealing customer details to competitors.

Comprehensive Credit and Political Risk insurance policies can be purchased to protect receivables across all forms of trade, export, commodity, structured and project finance transactions. There also a limited number of insurers who can provide these policies for non-trade, commercial and unsecured loans such as revolving credit facilities for both cross border and domestic loans.

Insurance will cover non-payment by the borrower/obligor and Government intervention that prevents payment. The contracts provided by insurers fall into two main categories:
  • Traditional Comprehensive Credit and Political Risk Insurance Policies

    The conditionality contained within these insurance contracts has significantly reduced since the advent of BIS regulations so that the only conditionality outside the insured Bank’s control is a nuclear/biological warfare and radioactive contamination exclusion and even this is not always required. All other conditionality which can  prevent a claim payment such as non-payment of premium, fraud by the insured bank, the insured bank’s own financial default/insolvency or failure to the insured bank to comply with the terms of the insured loan documentation, are within the bank’s own control.

    Capacity of up to $1 billion per transaction is available for any length of tenor up to 15 years. A typical insurance contract would be for around $150m for tenors of 6 to 60 months.

  • Comprehensive Non-Payment Insurance

    These policies are unfunded risk participations in all but name. Conditionality is limited to conditions precedent which can all be complied with before the policy incepts so as long as premium payments are made the policy will cover non-payment by the obligor for any reason whatsoever.

    Available capacity is up to $300 million for tenors of up to 15 years. A typical insurance contract would be for around $50m for a 5 to 7 year tenor

BIS lll Compliancy

All banks can accept Comprehensive Non-Payment insurance policies as BIS lll compliant and therefore allocate the requisite capital relief to insured receivable. This is achieved as the insurance contract falls within the BIS definition of a financial guarantee because:
  • There is no conditionality beyond the insured banks control
  • There fixed pricing formula set at policy inception
  • The policies are non-cancellable (except for non-payment of premium)
  • They are provided by insurers with a minimum credit rating of A-, typically A or A+
For the traditional Comprehensive Credit and Political Risk policies, if there is a nuclear/biological warfare and radioactive contamination exclusion, IRB Advanced banks have the discretion to accept this conditionality by modelling in the risk of such an event and reducing the capital relief accordingly.

Pricing
Premium rates are typically a function of the bank’s margin. Traditional insurance policies normally cost around 70% of the gross margin while comprehensive non-payment policies cost around 85% of gross margin.

There is a growing trend by insurers for the percentage of margin to be applied to the margin net of internal cost of funds, although there is only a limited number of providers willing to do so at this current time.

Private Market vs ECA’s
Private market insurance can be used in conjunction with ECA insurance or as an alternative. The advantages of private market insurance include:
  • The are no eligibility criteria such as foreign content or nationality of the insured
  • Superior policy contracts and scope of cover
  • No requirement for an underlying contract of trade or investment
  • Insurance can be arranged at any stage of a loan and can be purchased on existing loans
  • Down payment structures can be insured
  • Responsiveness. Policies can be negotiated and finalised in very short timeframes
Claims History
Since 2008/9, private market insurers have paid an estimated $4 billion of claims due to the advent of more robust contracts of insurance and a strong willingness to pay claims.

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