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Credit insurers fear PRA default proposals

The credit insurance market is concerned that a Prudential Regulation Authority (PRA) proposal to call defaults after a 90-day waiting period, rather than 180 days at present, could have a chilling effect on the $1.75tn sector.

The credit insurance industry has used a recently closed PRA consultation to criticise the regulator for failing to understand how political risk insurance works.

The PRA is currently considering responses to its consultation about when a default counts as a default. The consultation closed on 29 October.

It follows an earlier paper from the regulator, published in February, about the speed at which claims have to be paid by banks.

The PRA gave credit insurers no opt-out on an interpretation of EU regulations that means insurers would have to pay credit insurance claims “within days but not weeks or months, of the date on which the obligor fails to make payment”.

Banks use credit insurance as a way of mitigating credit risk.

Lenders operate under strict EU solvency capital requirements, but they can use tools like structured trade credit insurance and derivatives such as credit default swaps to deploy extra capital and improve capital efficacy.

A later paper proposed that defaults be called some 90 days after a non-payment. However, nearly all political risk insurance policies in the London market have a 180-day non-payment clause before a claim can be called.

Even long after that, insureds often prefer for restructuring talks to carry on, rather than writing off the entire loan and getting indemnified through the credit insurance.

An example of this in action is the credit insurance on loans to Mozambique government linked entities ProIndicus and Mozambique Asset Management, structured in the 2013-2014 year of account.

The $2bn of loans, a significant portion of which is insured, have been in default since early 2017.

It is thought that the banks that bought the insurance – Credit Suisse and VTB – have yet to call in the insurance as restructuring talks are ongoing.

Vinco David, secretary general of the Berne Union, an international body representing credit insurers, told The Insurance Insider: “The impression is that the PRA has written this without consulting the industry.”

David said the organisation had provided feedback to the PRA “about the consequences of their proposal and the damaging effect this would have on trade and job creation”.

“If you need to pay on demand you will have flows of money that are totally unnecessary,” David added.

Berne Union data shows that more than $106.6bn of structured trade credit and political risk insurance was written in H1 2018 alone. 

Another critic of the proposals is Geoff Wynne, partner at Sullivan & Worcester, a trade finance-focused law firm.

Wynne said he had been involved in drafting a “very strong rebuttal” to the plans on behalf of the International Trade and Forfaiting Association.

He described the process as “very frustrating”.

One broking source even speculated that the impetus behind the proposals could have come from people in the derivatives market looking to improve market share.

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