Following the outbreak of the pandemic in early 2020, the Credit and Political Risk Insurance market entered into a challenging period, which was compounded by Russia’s invasion of Ukraine last year. From a general point of view, despite an increasingly gloomy risk environment, the market’s theoretical capacity kept growing in 2022, reaching a total available capacity of USD 11.9 bn. Risk appetite has unsurprisingly shifted but insurers remain committed to supporting their existing clients. Insurers have shown some flexibility to support new industries, new flows of business and are willing to study new structures inevitably linked to the evolution witnessed by traders and banks in their respective markets.
One of the main changes is the quality of the enquiries being submitted to insurers. Indeed, due to the high price environment particularly in the energy sector, a lot of financial institutions, trading houses and utility companies have an increased need to distribute risk to stay within their own credit appetite. As a result, the insurance market has seen an increase in the number of enquiries for counterparties in developed countries that have rarely been seen by CPRI Insurers, such names include the likes EDF and Axpo. The conversion rate from enquiry to policy was much higher: in 2020, BPL received a total of 2,244 enquiries out of which 770 policies were placed in the market, while in 2022 we received 2,342 enquiries and placed 1,245 policies.
In terms of premium rates, we have seen increases due to high demand on very strong counterparties as explained above, but also linked to concerns over potential significant claims arising from the Ukraine conflict and the pandemic emergency help packages being progressively unwound by governments. This rising corporate default sentiment is also highlighted by the Credit Outlook Survey recently released by IACPM which revealed that 91% of the financial institutions that responded expect default to rise in Europe and 68% in Asia in 2023. This can be an important change after relatively benign claims activity for the CPRI market in 2022 where we have seen losses incurred on Political Violence policies (triggered by physical damage/lack of use/access to physical assets based in specific areas) and losses arising as a result of sanctions prohibiting the payment/receipt of payment by certain counterparties (as opposed to losses due to credit issues with the counterparty).
A very important topic that is preoccupying banks, insurers and brokers is the transposition of the final Basel III standards by the EU legislators. The impact on banks using the advanced approach might be significant if the Loss Given Default linked to credit insurance is maintained at 45% as is currently being proposed. For banks using the standardised approach, the impact will be less significant and the European Banking Authority is likely to independently clarify the eligibility of insurance as a Credit Risk Mitigant. EU legislator’s final decision is expected in the summer 2023 and we still await FINMA’s position on the subject.
