Risk Appetite Remains Strong, Says Gallaghers

Capacity remains close to an all-time high in the credit and political risk commercial insurance market despite rising geopolitical tensions, according to Gallagher, one of the world’s largest insurance broking, risk management and consulting services companies.

Whilst the risk appetite of some insurers is still tempered by losses connected to the commodity downturn, for the most part the market remains open to underwriting opportunity.   Supported by new entrants, activity from January to July 2019 — as identified by key players in the market — has been aided by:

  • Traditional insurance buyers acquiring more insurance, as the product becomes embedded in their own businesses. This is particularly the case for banks;
  • Further cooperation between the private market and the public sector (such as export credit agencies and multilateral institutions), with commercial insurers taking an optimistic view of the impact public sector institutions can have, especially when transactions face challenges.

Credit risk is where the counterparty risk insured is a commercial entity with a majority private ownership. Political risk is where the cause of loss (either equity investments or debt) is limited to government actions and/or political perils.

Headline numbers for capacity stand at:

Political risk

$3.092 billion

Trade and secured Non-Trade Gov’t Counterparty

$3.123 billion

Trade and secured Non-Trade Private Counterparty

$2.475 billion

Unsecured Non-Trade

$1.752 billion

“With US-China trade tensions continuing, territorial disputes in South East Asia, rising tensions in the Gulf and depreciating emerging market currencies putting a strain on foreign debt repayments, the range of risk factors and potential issues for insureds and insurers alike is showing no signs of slowing in 2019,” said Matthew Solley, Managing Director, Structured Credit and Political Risks, Gallagher.

“Despite such issues, the increasing depth of expertise within the market is enabling insurers to continue to take on risks in challenging territories, providing cover which is of critical importance in enabling emerging market growth, whilst policy holders have the benefit of protection from well rated insurers.. Effective risk mitigation for trading, financing and investment activity globally leads to a more stable environment for investors, corporates, financiers and traders in uncertain times.”

Regulatory issues

Unfunded credit protection remains a subject of scrutiny for UK and European regulators. For example, the Prudential Regulatory Authority’s (PRA) policy statement, issued in March 2019, addressed the eligibility of guarantees as unfunded credit protection. This action was welcomed by the market for its pragmatic approach, particularly on the timeliness of claims payments under insurance policies. The European Banking Authority (EBA) has since published a consultation paper which contains issues for unfunded credit protection.

Matthew Solley adds: “In response to such regulatory hurdles, the commercial insurance market and its key participants have shown an ability to act in a coordinated fashion for the benefit of all stakeholders. Whilst the impact of the updating of the Lloyd’s rules surrounding the underwriting of unsecured non-trade credit is not yet significant, one of the consequences is that traditional trade credit business is now having to compete with a wider variety of credit driven exposures. Thus, whilst trade and trade related financing remains a fundamental component of the market, underwriters are to some extent able to be more selective in their approach.”

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