Credit risk insurance (“CRI”) is a tool to support lending and portfolio management. It is written by a deep and long-established market. CRI offers banks a means of increasing lending limits on key borrowers and, where approved, reducing risk-weighted assets (“RWAs”) where it qualifies as a guarantee under banking regulations to deliver credit risk mitigation.
In contrast to residual value insurance (RVI), CRI pays compensation in the event of a payment default by a borrower under a loan. The eventual sale of the ship constitutes a recovery. Insurers are developing their appetite for shipping and offshore loans and will also cover ports, terminals and aviation assets.
Insurers are selective and look for exposure to better-quality borrowers and for a strong risk alignment with the bank. CRI of up to $150-200m per loan can be arranged on a syndicated basis and maturities can extend to 10(+) years with most capacity at 5 years. Premiums are usually set as a percentage of the loan margin and allowance can be made for elevated funding costs. Fees are not normally shared. Banks are required to keep a minimum 10% of the loan uninsured to establish an alignment of interest. The insurance is silent to the borrower.
There is scope to insure both new loans and existing loans for portfolio management purposes.