The Lloyd’s Market Association (LMA) has set off alarm bells, in its response to the “Credit risk mitigation: eligibility of guarantees as unfunded credit protection” consultation paper of the Prudential Regulation Authority (PRA).
The trade body believes that reducing the efficiency of credit insurance in helping banks mitigate risks poses a threat to the UK financial services sector – to the tune of US$150 billion of exposure gap in credit risk cover. Responding to the consultation, the LMA stressed the importance of non-payment insurance not only in the banking industry but also in the wider UK economy and global trade.
It noted that non-payment insurance products paid more than US$2.6 billion in claims to regulated financial entities between 2007 and 2017. “These products support a wide range of lending, with global exposures insured on a transactional basis currently estimated at US$100 billion to US$150 billion,” said the association.
“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,” commented David Powell, the LMA’s head of non-marine underwriting. “Working closely with the IUA (International Underwriting Association of London), 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.”
Key recommendations for the PRA include considering the wider economic impact on costs, lending, and global trade flows if existing credit risk mitigation (CRM) techniques are disrupted, as well as confirming that banks may continue their current approach to non-payment insurance as CRM until a revised supervisory statement has been issued.
“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,” said James Bamford, chair of the LMA political risk, credit and financial contingencies panel, and global practice leader political lines at Talbot Underwriting Limited.