16 May 2018

LMA warns of $150 billion exposure gap in credit risk cover in its response to a PRA consultation on unfunded credit protection 

The LMA in a response today to the PRA’s consultation paper “Credit risk mitigation: eligibility of guarantees as unfunded credit protection”, warns of a risk to the UK financial services sector if the efficiency of credit insurance is reduced in helping banks to mitigate risks. The PRA’s consultation is looking at some of the key credit risk mitigation (CRM) eligibility criteria of unfunded bank guarantees, including non-payment insurance, in terms of timeliness of payment, enforceability, clarity and incontrovertibility. The LMA’s comprehensive response highlights the vital role that non-payment insurance, used as CRM, plays in the banking sector and in supporting global trade and the UK economy.

Non-payment insurance products paid over US$2.6bn in claims to regulated financial entities between 2007-2017, with no claims made going unpaid except those where operational failure on the part of the insured made the claim invalid. These products support a wide range of lending, with global exposures insured on a transactional basis currently estimated at US$100bn to $150bn.

James Bamford, Global Practice Leader Political Lines at Talbot Underwriting Limited, and Chairman of the LMA Political Risk, Credit and Financial Contingencies Panel said: “Disruption to this market could create a series of negative effects for banks, such as damaging financial stability, reducing resilience to volatility, increasing costs, reducing lending capacity and ultimately reducing global trade flows.”

The LMA’s key recommendations to the PRA are as follows:

  1. PRA should consider the wider economic impact on costs, lending and global trade flows if existing CRM techniques are disrupted.

  2. PRA to confirm that credit insurance products can meet the Capital Requirements Regulation (CRR) where the lender has the right to pursue the guarantor in a timely manner once the claim has been validated, in line with the PRA’s interpretation of timeliness for other CRR qualifying products.

  3. Insurance contracts that contain systemic risk exclusions can remain consistent with the incontrovertibility requirements of the CRR.

  4. PRA to confirm that, until a revised Supervisory Statement has been issued, banks may continue their current approach to non-payment insurance as CRM.

 David Powell, the LMA’s Head of Non-Marine Underwriting said: “The LMA is concerned that the proposals set out in the consultation paper could damage the on-going use of non-payment insurance as a robust and effective transfer of risk for banks. Working closely with the IUA, leading political risk and credit insurance brokers and other banking and insurance stakeholders, we have developed a comprehensive response which seeks to address the PRA’s concerns and ensures the ongoing successful operation of this insurance marketplace which is vital for our economy.

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Notes to Editors

For further information please contact:

James Milne, Head of Communications
Lloyd’s Market Association
T 020 7327 8405

About the Lloyd’s Market Association (LMA)

Formed in 2001 and located in the heart of the Lloyd’s Building in the City of London, the Lloyd's Market Association represents the interests of the Lloyd’s underwriting community. All underwriting businesses at Lloyd’s are members, together managing gross premium income of around £32billion per annum.