London market warns PRA proposals could limit credit cover and increase cost

London market insurers could withdraw from selling credit risk insurance to banks and increase the cost of cover if proposed regulations are introduced, according to the International Underwriting Association (IUA) and the Lloyd’s Market Association (LMA). Proposals by the UK’s Prudential Regulatory Authority (PRA) regulator in February, to strengthen requirements for unfunded credit protection under its Capital Requirement Regulation on the banking sector, could limit how banks insure non-payment of trade finance assets. Under the proposed changes, insurers would be required to pay claims within days of a default and critics of the proposals have warned that this is impractical to the point that many providers would exit the market. In its submission paper to a PRA consultation that closed this week, the IUA said credit risk insurance would become more expensive under the new rules and the market would retract. It called on the regulator to reconsider its proposals. The LMA has warned that the proposals risk destabilising the UK financial sector and creating a $150bn global exposure gap for credit risk cover. “The credit insurance product has historically worked well, continues to do so and is valued by clients,” said Chris Jones, IUA director of legal and market services. He noted that credit insurance has become particularly important for banks looking to optimise their capital allocation under Basel III rules. “Our research on this issue has revealed widespread concern that the regulatory proposals will make the market less attractive and that alternative forms of security are in some circumstances problematic and limited,” he said. Mr Jones added that insurers and reinsurers offer excellent security to banks and warned that any disruption to the credit risk insurance market risks banks transferring their lending outside the UK. The IUA said banks often wait several weeks to investigate defaults before lodging a claim with insurers. Imposing a time limit to settle claims within days of a default, as the PRA suggests, would not allow for full claims assessment processes, it added. “The proposed changes would result in insurers becoming de facto liquidity providers,” said Mr Jones. “In order to process claims quickly, insurers would be quite reliant on receiving information from the lender in good time – a process over which they have limited control.” He added: “Our feedback suggests that banks do not rely on credit insurance as a primary source of repayment in the immediate term. There seems little value in turning an insurance claim based on indemnity principles into a stop-gap payment.” The LMA said the regulator’s proposal to change credit risk mitigation eligibility criteria of unfunded bank guarantees may destabilise the UK financial sector and cause a $150bn global exposure gap in credit risk cover. James Bamford, chairman of the LMA’s 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.” In its submission to the PRA’s consultation paper, the LMA also asked the regulator to reconsider its proposals. David Powell, head of non-marine underwriting at the LMA, said: “The LMA is concerned that the proposals set out in the consultation paper could damage the ongoing use of non-payment insurance as a robust and effective transfer of risk for banks.”

London market warns PRA proposals could limit credit cover and increase cost

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