When one company buys or trades goods or commodities, there are resulting risks that arise and need to be considered:
• The performance risk of the seller which is borne by the buyer: e.g. if the seller does not deliver on time or the agreed quality / quantity described within the sales contract is not as it should be;
• The credit risk on the buyer which is borne by the seller: e.g. if the buyer defaults on its contractual payment obligation(s);
• The political risk which can arise in the country where the goods / commodities can be in transit or stored.
These risks can be mitigated by insuring them with the specialist Credit and Political Risk Insurance (“CPRI”) market. The CPRI market is mainly based in London and consists of circa 60 individual insurers consisting of both insurance companies and Lloyd’s of London. The support and protection the CPRI market provides trade, export and commodity finance activity is often welcome by buyers or sellers when the value of contracts is large or when the number of contracts is significant. It is a useful mitigation tool for corporate risk managers but also for banks who finance the underlying trade who see such insurance protection as a security, thereby enhancing the credit profile of their borrower.
Today, with an estimated total of around USD 350 billion in live exposure, CPRI insurers play a central role in facilitating trade and economic development across all five continents and in practically every country in the world. Currently, banks represent 55% of the CPRI market client mix, while corporates (e.g. exporters and commodity traders) represent 30% and other financial institutions making up the remaining 15%.
The CPRI market has a long history with trade and commodities activity with a deep level of understanding of its clients’ business. Whilst the market’s coverage offering has broadened significantly in the past five to ten years, trade and commodity related business remains a core part of its activity. In 2020, enquiries related to risks in extractive industries (Oil, mining and metals) represented a healthy percentage of all transactions submitted to CPRI insurers. 2020 has seen a fair number of challenges for the market from the impact of the COVID-19 pandemic to the well-publicised frauds involving businesses in both Singapore and Dubai. The latter resulted in significant claims volume for the insurers involved which could in turn lead to insurers’ offering in the space becoming more selective in terms of the risks they are willing to insure, however overall, the CPRI market should still be viewed as an informed, strong and reliable option for risk managers and banks to consider when seeking to manage and mitigate their country and credit risk around the world.
