In its response to the European Commission’s (EC) consultation on the implementation of the Basel III reforms, the Lloyd’s Market Association (LMA) has said that banks’ use of non-payment insurance should be recognised in regulatory capital calculations.
In light of proposed changes to the Capital Requirement Regulation (CRR) and the Capital Requirements Directive (CRD), the EC is consulting stakeholders.
In response, the LMA has advocated 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 LMA has urged the EC both to accept insurers’ substantial financial strength, and also to account for banks’ privileged position as policyholder, which is protected by law.
“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,” said James Bamford, Chairman of the LMA Political Risks, Credit and Financial Contingencies Business Panel and Global Practice Leader Political Lines at Talbot Underwriting Ltd.
In its response, the LMA underlines the unique CRM strengths of non-payment insurance and notes that as policyholders, the banks’ exposure to insurers is not comparable to direct creditor exposures to insurers, given that statutory provisions protect the privileged position of the policyholder.
European bank lending is strongly supported by non-payment insurance, especially in parts of the world and for transactions where other CRM options are limited. According to the LMA, every $1 of insurance supports on average $17 in bank financing of economic activity.
Data also shows that between 2007 and 2018, claims totalling over $3.19 billion were made by financial institutions under non-payment policies, of which 97% were paid in full and on time.
David Powell, Head of Non-Marine Insurance at 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.”
