LMA advocates Basel III recognition of non-payment insurance by banks

Banks’ use of non-payment insurance should be recognised in regulatory capital calculations...

...according to the Lloyd’s Market Association’s (LMA) response to the European Commission’s (EC) consultation on implementation of the Basel III reforms. The EC is consulting stakeholders on proposed changes to the Capital Requirement Regulation (CRR) and the Capital Requirements Directive (CRD), which will define acceptable components of banks’ regulatory capital.

The LMA seeks to ensure that the proposed changes acknowledge the unique characteristics of non-payment insurance and the benefits to banks of using such insurance for credit risk mitigation (CRM). The consultation response urges the EC both to accept insurers’ substantial financial strength, and to account for banks’ privileged position as policyholders, which is protected by law. 

The LMA response emphasises the unique CRM strengths of non-payment insurance, which is widely underwritten by Lloyd’s syndicates and other insurers.

• As policyholders, insured banks’ exposure to insurers is not comparable to direct creditor exposures to insurers, since statutory provisions protect the privileged position of policyholders.

• Non-payment insurance provides significant support to European bank lending, especially in geographies and for transactions where other CRM options are limited. Every $1 of insurance supports on average $17 in bank financing of economic activity, according to data from LMA/IUA-sponsored research.

• Insurers’ claims-payment track record is exceptional under non-payment policies. Between 2007 to 2018, claims totalling more than $3.19 billion were made by financial institutions under non-payment policies, of which 97% were paid in full and on time.^†

• Lloyd’s insurers are low-correlated CRM providers, because their core insurance business is focussed on other risks, which reduces potential systemic risk from the use of non-payment insurance. The insurance industry’s ability to absorb large losses is well tested.

James Bamford, Chairman of the LMA Political Risks, Credit and Financial Contingencies Business Panel and Global Practice Leader Political Lines at Talbot Underwriting Ltd. said, “A contract of insurance provides enhanced characteristics as a Credit Risk Mitigation, to which we are asking the EC to give full consideration in respect of the proposed changes to the CRR and CRD.”

David Powell, Head of Non-Marine Insurance at the LMA, said: “The insurance industry is extremely well-regulated and well-capitalised. We are asking the EC to avoid any changes that could disrupt vital CRM support to banks, especially in sectors where other forms of risk transfer are difficult to obtain.”

The LMA worked closely with the International Underwriting Association of London (IUA), the International Credit Insurance & Surety Association (ICISA), and the International Trade and Fortfaiting Association (ITFA) in responding to the consultation.

^† 2007–2017 “Single Situation” Non-Payment Claims For Banks & Financial Institutions. NB: The remaining claims were rejected due to operational failure by the insured institution (failure to comply with explicit policy requirements), but insurers still paid 44% of those claims under settlement agreements.