IUA issues credit risk reform warning

Credit risk insurance policies could become more expensive and less readily available if proposed new regulatory changes are pursued, the International Underwriting Association (IUA) has warned. It went as far as to say planned reforms could cause some London Market insurers to conclude the product is no longer viable, creating considerable issues for bank lending.

Responding to a consultation paper published by the Prudential Regulation Authority, the IUA stated that the changes failed to recognise the importance, flexibility and effectiveness of credit risk insurance provided to banks and other financial institutions. The association called on the regulator to reconsider its proposals and review their potential impact on the London insurance market, the UK economy and wider global trade flows.

“The credit insurance product has historically worked well, continues to do so and is valued by clients,” commented Chris Jones, IUA director of legal and market services. “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.

“Insurers and reinsurers represent an excellent source of security, coupled with proven claims handling and payment performance. If the market for credit risk insurance is disrupted there is a danger that banks will transfer their lending to other jurisdictions which would be hugely detrimental to London banking, insurance and the UK financial services sector generally.”

The PRA’s consultation paper interprets the obligation for insurers to pay out in a timely manner as settling claims within days of a credit default occurring. It is, however, not uncommon for many weeks to pass before a bank even informs its insurer of a potential claim. This delay may be for quite valid operational reasons as, for example, a bank evaluates the extent of a borrower’s financial difficulties before deciding whether an insurance claim is required.

Necessitating claims to be settled within days of a borrower failing to make a payment would not allow time for usual investigation and claims assessment processes to be followed.

“The proposed changes would result in insurers becoming de facto liquidity providers,” Jones said. “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.

“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.”

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