How growth and innovation in credit insurance can unlock latent capital

Credit insurance is rapidly growing. Effective collaboration between banks, insurers, and reinsurers is channelling capital to developing-market projects.

Credit insurance, which protects financial institutions, or sellers of goods and services, against bad debt and is therefore used as an important risk management tool, is in an exciting growth phase. As a result of innovation and effective collaboration between banks, insurers, and reinsurers, much latent capital has been unlocked, allowing a range of developing-market projects to take off which might have otherwise been deemed as ‘too risky’.

So why is this tool not being used more broadly to channel funds to where they are most needed? The challenge lies in the market not being as well understood as it could be.

The non-payment insurance market for single risks is worth an estimated €2.2bn pa in premiums and growing, and is used to facilitate an estimated €600bn of lending to the real economy, according to ITFA1. The World Trade Organization reports2 that 80% to 90% of world trade is in some way reliant on trade finance and that the private credit insurance market plays a significant role in this.

“The market has really grown and become innovative over the past five years,” says Gary Lowe, Managing Director and Head, Global Credit Insurance Group at Standard Chartered. “There’s a real synergy between banks, clients, brokers, the insurers and reinsurers – it’s a fantastic piece of the credit market that could translate to channelling more capital to areas and projects that will benefit the most.”

Strong momentum and innovation

The growing appetite and momentum is encouraging. As a major supporter of the credit insurance market, Standard Chartered harnesses it to manage portfolio exposures, optimise capital and support clients in achieving their aims, while generating stable returns.

The market offers ways to provide credit support that mobilises a broad base of funding to support a pool of development projects, including those that support the United Nations’ Sustainable Development Goals. The 2008 global financial crisis made banks and other private institutions more cautious about lending to these projects, and that confidence has yet to fully recover. This is particularly true for larger-sized projects, according to the International Finance Corporation3.

Defusing the risks and matching appropriate risk levels to risk appetite using credit insurance as a risk mitigation tool, can help the private sector continue to accelerate capital toward these goals, something that’s taken on increasing importance as the world recovers from the COVID-19 pandemic and the gap between the ‘haves’ and ‘have nots’ has widened.

Higher yields are attracting institutional investors to emerging markets in Asia, The Middle East and Africa; this trend coupled with the market’s optimism towards continued global growth has been an important driver in keeping the credit insurance momentum going. And as the market grows, so too is product innovation and creativity – including derivative transactions, structural products that share risk, securitisation and increased collaboration with pension funds.

Other innovative structures include securities lending, loan repackaging, insuring loans to special purpose vehicles, financing projects that support environmental, social, and governance (ESG) goals, and innovative risk analytics models. These are all great examples of how collaboration, innovation, and creativity play an important role in driving positive change and channelling capital to where its impact is greatest.

How credit insurance can unlock latent capital

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Non-correlation adds attractive appeal

The non-correlated nature of credit insurance, or its ability to outperform the market when economic growth slows or not being impacted by an event that shakes the core insurance market such as natural catastrophe, makes its appeal even more attractive.

Credit insurance can generate a relatively stable return on capital even in turbulent times, with insurance companies viewed as safe havens, especially during volatile markets.

The future of the market

Standard Chartered’s outlook is positive, after it placed the most credit insurance product ever into the market in the first quarter of 2021. Going forward, the team is focused on deepening the market’s appetite for a broader range of bank originated credit assets.

“It’s not just about the premiums coming in and the claims going out,” says Mr. Lowe. “It’s a broader financial ecosystem that rises and falls together, [it’s] about an ongoing relationship − and being there also if things don’t go according to plan.” This is also at the heart of Standard Chartered’s brand promise: being here for good.

This article is based on themes discussed during a panel discussion at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.

1 International Trade and Forfeiting Association, survey May 2019