After three years of effort and numerous negotiations with insurers, banks, law firms, and brokage firms, ITFA has released a Basel III policy form that elevates policy wordings and enhances market efficiency, based on an original policy form developed by Willis Towers Watson.
Trade credit insurance, which covers the risk of non-payment by borrowers and obligors in typical trade finance products and loans, has been shaped by legal change, the Basel Accords and regulatory capital relief.
This new form is designed to cover receivables policies, but should also be viewed as a strong platform for devising compliant policies for other situations and products.
“Banks and insurers have held tight to their own negotiated form,” said Scott Ettien, executive vice president at Willis Towers Watson.
“All negotiated forms are confidential so comparison is difficult. Countless hours are spent negotiating forms, with most of these – if not all – landing on similar wording.
“These protracted negotiations are expensive and time-consuming and frustrate all parties, especially the bank customer seeking advantageous balance sheet treatment.
“Furthermore, the market is constrained as not all insurers accept a specifically negotiated bank Basel policy, thus limiting the capacity levels the bank can acquire, with their form, in the credit insurance market.”
“This is the first step of many in a direction to further standardise a Basel III trade credit policy,” said Sean Edwards, chairman and CEO of ITFA.
“Consistency, predictability, and a reliable form is paramount to regulatory bodies further recognising trade credit insurance as a viable risk transfer mechanism for capital substitution.
“We need all banks, insurance companies, law firms, and brokers moving in the same direction if we are to grow the overall industry.
“It is difficult, if not impossible, for individual bank users, underwriters, and brokers to develop common wording, making the role of a trade industry association such as ITFA, that can bring all the parties under a single and impartial roof, indispensable, and it is immensely satisfying that we were able to provide this forum.”
The project, which was spearheaded by Ettien’s Basel III Think Tank Initiative, has morphed into today’s ITFA release, which has involved over 40 firms, hundreds of hours of policy negotiation, and a collaborative industry effort.
“I’m very proud of what this group accomplished as it is ground-breaking and will help lead this insurance segment forward as we continue to enhance this policy form” said Ettien.
The magnitude of many of these programmes may necessitate multiple insurers allocating capacity. This will mandate a consistent policy form when syndicating an insurance placement.
To be as useful as possible to banks and achieve risk weight substitution, a consistent form recognised by the industry is paramount for predictability and speed of execution.
A joint memorandum from two law firms, Sullivan & Worcester UK LLP and Clifford Chance, provides guidance to the reader that will help streamline final policy negotiations.
Geoffrey Wynne, head of trade and export finance Sullivan, said: “We are very pleased to have been involved in this significant project which, ultimately, will help market participants when negotiating trade credit insurance policies.
“It is a very good starting point for negotiations, but of course will need more work as the market continues to adapt and develop.”
Benjamin Lee, New York associate at Clifford Chance, said: “This is a time of tremendous growth and opportunity in the credit insurance market, and we’re pleased to have contributed to this project alongside fellow leaders in the field.
“We believe that this template policy will help drive continued innovation in the market, and we look forward to what’s on the horizon.”