9.1 KYP (Know Your Policy) – Learnings from CPRI in a post-Covid world

9

EXPORT, INSURANCE AND LONG TERM FINANCE

SIMON BESSANT Director The Texel Group

CAROL SEARLE General Counsel The Texel Group

9.1

KYP (Know Your Policy) – Learnings from CPRI in a post-Covid world

It is estimated that some EUR 600bn of support to real economy businesses is provided by the credit risk insurance market, according to a recent survey by ITFA. Credit insurance is crucial in facilitating bank lending and in supporting trade flows. Trade credit insurance cover is largely used to provide capital relief – i.e., nonpayment credit risk insurance, surety and risk participations. COVID-19 has certainly changed the behaviour of underwriters, and we wanted to find out where the CPRI market might be headed in a post-pandemic world.

TFG’s Deepesh Patel (DP) caught up with Private insurance and risk mitigation experts Simon Bessant (SB) and Carol Searle (CS) from The Texel Group, speaking on policies, types of insurance product, where the CPRI market might be headed in a post-pandemic world and appetite in 2020.

CPRI: THE VITAL COG IN TRADE FINANCE

Deepesh Patel (DP): Credit insurance is a vital cog in the world of global trade and finance. Given the current situation, can you highlight the importance of trade credit insurance and why it plays such an important role in the real economy?

Simon Bessant (SB): Thank you Deepesh. I think it’s important to identify and split the market by product. Firstly, there are the trade credit insurers, who export or sales of goods and commodities on a short-term basis, normally offering their product on a ‘whole turnover’ or ‘named buyer’ basis. In this market, policyholders can cancel limits or reduce their levels of cover. On the other side of the market, sits the ‘structured credit insurance’ product or ‘nonpayment’ insurance product, where the main users are banks and commodity traders who are using this for various regulatory capital optimisation or balance

predominantly support the sheet protection. This product is non-cancellable and often serves longer tenors, with policy sizes often running to hundreds of millions.

Both of these market products are incredibly important for mobilising lending and economic

development both in the good and the bad times.

In light of the COVID-19 pandemic, there has recently been a lot of press coverage around how we can bring back our economies into a ‘V-shaped’, or ‘ tick-shaped’ bounceback, as opposed to a long and depressed form of recovery; credit insurance will form a vital part of that. The trade credit insurance market certainly needs support in order to help those short term economic indicators to be improved to allow retail supply chains to be put back in place. In addition, on the structured credit insurance market side, support is also needed in the international lending space so that international trade can continue. To summarise, both sides of the credit insurance market have a vital importance in their various economic drivers or economic incentives over the coming years, particularly when we’re looking at an economic recovery post pandemic.

TOP TIPS FOR CREDIT INSURANCE POLICIES

DP: Carol, can you give our listeners some top tips and also tell us a little bit more about why policies are important and some of the duties and obligations here?

Carol Searle (CS): Here are my top tips in terms of key principles, duties and obligations, as well as dealing with potential problems or making claims.

We can look at this into two stages: firstly, the principles that apply if you’re using an insurance policy, and secondly, what the key duties and obligations are. Then it’s worth looking at what happens when there are problems and one makes a successful claim because ultimately, the starting point in all of this, is that a company buys an insurance product to protect itself against the risk of loss.

(1) Key principles that apply in using an insurance policy

It’s vital for any company or bank buying an insurance policy to understand exactly what it has purchased, as well as what it has to do to make sure that if there is a loss, the company is able successfully to make a claim. Many banks buy insurance policies for capital relief, so the policy may have a dual-use. The non-payment cover for banks is clear, it is comprehensive cover, meaning that if there is a nonpayment for any reason, a loss should be covered, unless it is excluded in the policy.

Whilst we are working in extraordinary times with COVID-19, non-payment policies for banks are unlikely to have COVID/Pandemic exclusions and so availability of cover under these policies should be straightforward.

It is crucially important that an insured party understands the scope of the cover under the policy as well as its terms and conditions – where cover is straightforward it is unlikely that there would be any dispute concerning scope of cover in event of loss, rather the risk of encountering issues in successfully presenting a claim are likely to arise out of a failing to comply with duties and obligations under the policies. So, understanding duties owed under English insurance law and the policy terms is vital. (2) Key duties and obligations

There are two distinct spheres of considerations when we explain the duties and obligations under policies:

There is a duty under English insurance law to give a fair presentation of the risk, which applies before the contract begins, and includes a duty to disclose material facts about the risk itself. The scope of this duty and who / how it will be discharged may be dealt with expressly in the insurance contract.

The second area that companies need to be aware of is what exactly the contract says and to understand the key provisions of the contract, including how a breach of different types of provisions may prejudice the cover. To this, there needs to be an understanding of the remedies for the breach of different terms.

In terms of the key obligations that you would find, particularly in a bank non-payment comprehensive cover, that these are drafted carefully so that banks are able to comply. By way of example of key obligations: the underlying obligation must be legally enforceable; the insured must keep a minimum retention (market usually requires 10% minimum); and there will be specific terms which deal with material amendments to the underlying transaction. If there is going to be an amendment to the transaction that’s been insured, there is often an obligation to consult and obtain the prior consent of insurers. So, these are the types of things that an insured need to have in mind when managing a policy.