Credit insurance is a fast-growing coverage. Suited to the risk and capital management requirements of banks, it also offers risk diversification opportunities for insurers. Our regional credit and political risks specialist John Moncavage explains the history, development and uses of this cover and how, using Miller’s expertise, both banks and insurers can realise commercial benefit.
History and development
Credit insurance first began in the late 1800s as a way for companies to protect one of the most important assets on their balance sheet - their accounts receivables. Insurance companies offered protection to clients against debtors defaulting and eventually this allowed companies to obtain receivable financing solutions, with banks becoming the beneficiaries of the insurance policy. As a comprehensive cover, it protects insureds from both political and commercial risks.
Over time, banks have gained comfort in the product, especially during difficult times of rising defaults where the product demonstrated successful claims performance.
Credit insurance today
Whereas historically the product was used by corporate companies to protect a portfolio of accounts receivables or single large exposures, banks began to use it themselves as a business enabler and commercial tool. Today, banks and financial institutions are thought to contribute circa 70% of the total premium income in the political and credit risk market.
Why banks in Asia Pacific should consider buying credit insurance
The combination of increasing customer demands, fierce competition, regulatory changes and the unknown impact of geopolitical events has resulted in banks seeking alternative risk management avenues. Credit insurance is widely used by European, Japanese and American financial institutions and this trend stems from the greater demand of local branches of foreign banks or local banks in the region. In addition, it is now widely used across Development Financial Institutions.
- the ability to increase deal participation, achieving greater access to Mandated Lending Arrangement positions, fees and ancillary business
- managing aggregate obligor, sector and country concentration limits
- regulatory compliant policies to recognise capital relief and improved returns.
Miller's Credit and political risks expertise
Why local insurers should consider offering credit insurance
Locally admitted insurance companies that have close business relationships, or even better in-country bank ownership, are in a unique position to leverage this in the credit insurance market. Demand is also growing to cover local loan books in Indonesia, Philippines, Malaysia, Thailand, Vietnam and other regional countries.
- accessing a risk free stream of ceding income where credit risk appetite is minimal or alternatively taking risk participations insurers develop their credit insurance underwriting capabilities
- strengthening relationships with current business partner
- gain additional product knowledge and applications
How Miller’s expertise can help
Whether you are looking to enrich a banking relationship or expand product offerings, Miller’s experienced team of technical experts and access to a worldwide network of reinsurers can create a bespoke structure to suit your needs.
For more information on this coverage, please contact John Moncavage.