Credit Insurance Schemes Return To Focus

Brexit and the CPRI market: plus ça change...

By Charles Berry, Chairman, BPL Global

Today, two months after the end of the UK’s transition period, EU 27 clients of the specialist credit and political risk insurance (CPRI) market are dealing with EU regulated brokers and placing their business with EU regulated insurers - very different from the pre-Brexit world of mainly dealing with UK regulated brokers and insurers. Plus ça change.

Despite this, the CPRI market’s EU clients, a very important part of the market, are placing very much the same business with the same global insurers. Operational problems over the last two months have been minimal, and longstanding commercial relationships have been maintained seamlessly over the whole Brexit transition. Plus c’est le meme chose.

The London CPRI market handles only about 2% of the USD110 billion of annual premiums handled by EC3 based insurance businesses, but like our general insurance colleagues we are used to dealing in a highly regulated global marketplace. Close prudential regulation for (re)insurers and conduct regulation for both (re)insurers and intermediaries is right and proper, and protectionist barriers shielding domestic insurance markets are only to be expected. The gift of passporting into the rest of the EU from the UK, on the back of a single “home state” authorization, was very much the exception to the normal regulatory environment for international business. Even in the post Brexit world, the regulatory burden we face in Europe is far lower than the complex, state by state administered regulatory hurdles the London market has to navigate in the USA. Despite these regulatory differences the wider London market has nearly 50% of its business with North America and only about 15% with the EU 27 (though for the CPRI market those percentages are probably reversed).

The Brexit vote in 2016 faced the market with the same challenge for Europe as we face in the rest of the world. In facing that challenge, the market acted on two assumptions: first, that Brexit would happen; and second, any deal with Europe would be the same for the London market as a “no deal” outcome, with no passporting or equivalence. Both assumptions proved right.

These challenges were simplified for many London insurance businesses by them being global businesses with EU 27 operations already in place. However, even for those businesses Brexit, while not a game changer, has certainly been a nuisance. For BPL, for example, it meant transferring many colleagues to the new UK branch of our well-established Paris business, no small change. However, most London market businesses began operating their post-Brexit model well in advance of the deadline, in our case from November 2019. Hence the minimal disruption at the start of 2021.

The nuisance of Brexit has been shared by our clients. They had the job of vetting the EU platforms of the insurers previously using their UK regulated carriers. However, this task was set in motion well ahead of the deadline, and was often fairly straightforward.

It was less straightforward for Lloyd’s. However, as well as a unique ability to combine entrepreneurial underwriting with massive financial strength, Lloyd’s genius over the years has been its ability to adapt to its everchanging environment. Lloyd’s Brussels became the latest manifestation of this ability. However, for our banking clients in particular, it took time and effort for clients to see the corporate Lloyd’s Brussels as presenting effectively the same security as the Lloyd’s syndicates that sit behind it and with whom they were used to dealing direct.

What are the London insurance market’s expectations over the anticipated EU-UK MOU on financial services? We as brokers expect little, not least as the EU Insurance Distribution Directive (IDD) does not recognise equivalence. Furthermore, even if progress is made for (re)insurers, for example on Solvency II, the CPRI market does not expect its new model for servicing EU based clients with EU regulated brokers placing business with EU regulated insurers to change.

Has Brexit effected CPRI market appetite? In our view, not at all. The last 12 months has been all about the pandemic which initially had a material impact on insurers’ appetite, even though today activity has returned to pre-pandemic levels.

Of course, the pandemic has also seen a dramatic effect on the London market’s operations. Home working, Teams and Zoom, and electronic trading has mentally untethered the market from EC3. The CPRI market is now more than ever functioning as one global, virtual coffee shop. CPRI market brokers and insurers, including many who use the Lloyd’s platform, see themselves as global businesses serving predominantly global corporations and financial institutions. London, along with New York, Bermuda, Paris, Zurich, Singapore and others, will a key hub for the CPRI market and other specialty (re)insurance business because of its unique insurance ecosystem, its language, its geographical position and its time zone, and (we hope) its continuing competitive regulatory regime.

However, the CPRI market and the other global specialty insurance markets remain respectful and compliant with the very wide range of different regulatory regimes in the territories where we conduct our business. Brexit has certainly changed the way we operate: the end of passporting means the CPRI market is now more European, not less.

Charles Berry

Chairman BPL Global

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PREPARING FOR THE UNKNOWN – Examining the policy landscape for re-opening the economy

By Daniel de Búrca, Head of Public Affairs, ICISA

With equal measures of hope and fear, “What happens next?”, is a question people have been asking themselves and their governments for the best part of a year.

While infections continue to fluctuate and vaccine rollout has been less than perfect in many locations, there at least seems to be an emerging path out of lockdown. Returning to normality is everyone’s goal, but how we get there is a complicated question and the implications for different approaches is something we at ICISA are looking at closely.

Unwinding the complicated web of support measures that have been introduced around the world is a huge challenge facing governments. The question for those in power is not simply, when should this happen or under what circumstances can it begin, but also which measures can and should be lifted first; which ones need to remain in place; and, what additional measures may be needed to mitigate the shock that turning off the tap may cause?

It was understandable that support structures put in place early in the pandemic were relatively blunt tools intended to insulate the entire economy quickly. Governments intended to protect otherwise healthy businesses, which under normal circumstances, would have remained viable. A side-effect of the broad approach taken has been that not only are viable companies protected, but potentially non-viable ones too.

To complicate matters further, the impact of the pandemic has been highly asymmetrical. Some industries have not only maintained their standing, but improved their position, while others have seen their entire business model questioned. Those pulling the levers of policy will need to be conscious of not only how consumer confidence rebounds, but the extent to which consumer behavior might have changed permanently. The level of support in place also dictates some of the complexity for governments. Economies more widely protected may have been better insulated from the impact of lockdown, but unraveling measures may be a more delicate prospect and the potential for shocks greater.

In November 2020, the OECD highlighted two of the key medium-to-long term challenges governments would have to respond to: increased insolvencies, and the prospect of debt overhang on investment. The authors noted that, ‘…policy makers need to strike a balance between the risk of phasing out support too early (thereby leading to liquidation of viable firms) and providing across-the-board support for too long (favoring the persistence of inviable firms)’. They suggest that a flexible approach which couples equity boosting measures for viable firms, as well as debt re-structuring and ultimately resolution mechanisms for non-viable firms.

Similarly, a paper published via the IMF in May 2021 by Yan Liu, José Garrido, and Chanda DeLong called Private Debt Resolution Measures in the Wake of the Pandemic identifies three key phases in the policy response of governments to the pandemic: the freeze phase (for early in the pandemic to respond to the immediate shock); the transition phase (interim measures as the economy emerges from lockdown); and, the final phase, combatting debt overhang. An interesting idea proposed by the authors is a triage system, which would help to identify businesses and sectors requiring targeted support going forward, while also creating a path to restructure debt or resolve non-viable entities. The authors note, ‘During this phase, insolvency and debt enforcement activity needs to be maintained, as it is crucial to uphold payment discipline and to incentivize debt restructuring’. However, as the situation stabilises, they recommend an eventual return to normal resolution and insolvency mechanisms. They also recommend governments consider reforms that could be introduced now to make these systems more efficient for when they will be needed.

Understanding how and when governments will open economies will give businesses the time (and potentially the tools) needed to prepare themselves for the end of certain measures and the introduction of others. For the EU in particular, close coordination between member states is essential and can make up for the lack of coordinated action early in the crisis. Governments need to consider carefully which support measures remain in different phases of recovery. They should carefully weigh whether the steps they take will enable the economy to resume normal functioning in an orderly fashion. Amongst other things, this could include ensuring that any stimulus is directed towards viable businesses, while providing an efficient path to resolution for non-viable firms.

For ICISA members, what governments do next is also a complicated question. As noted in our recent annual survey of members, members expect claims to rise in both TCI and Surety, but demand for products and services is also expected to grow due to the increased perception of risk. New economic stimulus packages, such as the recent USD 1.9 trillion relief bill in the US, plus expected further investment in infrastructure around the world are also likely to have an impact on our industry.

At the same time, state-backed credit insurance schemes also remain in place in a number of EU markets as well as a smaller number of non-EU markets. In the EU context, the temporary framework, which allows member states to introduce support measures, was extended in January to apply from 1 July until the end of 2021. Discussions in member states with credit insurance schemes are likely to resume shortly on whether, or in what form, those arrangements are prolonged. Whether these schemes are considered necessary for the transition to normal economic functioning remains an open question. We discuss some of the intricacies of this debate from the perspective of ICISA members elsewhere in the Insider.

Blanket support from governments have been very successful in limiting the damage of the pandemic on economies. Given that some sectors are likely to remain impacted and recover slower than others, a more targeted approach may be needed going forward. “What happens next?” remains as unclear as ever, but governments have a number of tools at their disposal to prepare and respond. Transparency and early planning can give businesses - and society - the opportunity to plan ahead effectively.