Media Release                                                                                     16 May 2018

IUA WARNS AGAINST CREDIT RISK REFORMS


Credit risk insurance policies are likely to become more expensive and less readily available if proposed new regulatory changes are pursued, the International Underwriting Association (IUA) has warned. Planned reforms could cause some London Market insurers to conclude the product is no longer viable, which may have a subsequent impact on 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,” 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.

“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.”

Ends


Contact:
Scott Farley                                                                                         
Director of Communications                                                                 
International Underwriting Association                         
Tel: 0207 617 4449
Mobile: 07876 758 637                                                            
E-mail: scott.farley@iua.co.uk                                                  

Notes to Editors:
About the IUA
The International Underwriting Association of London (IUA) represents international and wholesale insurance and reinsurance companies operating in or through London. It exists to promote and enhance the business environment for its members.
The IUA’s London Company Market Statistics Report shows that overall premium income for the company market in 2016 was £22.725bn. Gross premium written in London totalled £16.034bn while a further £6.691bn was identified as written in other locations but overseen by London operations.