ITFA publishes its Revised Guidelines for CRR-compliant non-payment insurance policies

Recent ITFA seminars and publications have made our members aware that the eligibility of insurance as a credit risk mitigant for Capital Requirements Regulation (CRR) purposes has been widely debated over the past year.

The drafting of the CRR left significant room for interpretation, and some financial authorities subsequently engaged in consultations in order to provide clarification. The best known of these were carried out by the UK’s Prudential Regulation Authority (PRA) and by the German Federal Financial Supervisory Authority (BaFin) in 2018.

Both financial regulatory bodies considered the issue of when insurance cover complies with the eligibility criteria relevant for “guarantees” as defined in the CRR, thereby enabling banks to reduce risk-weighted assets.

On 22 May 2019, Grant Eldred of Thomas Cooper gave an entertaining and informative presentation at the ITFA Northern European Regional Committee (NERC) event on “Risk Mitigation – Outcome of the PRA Consultation Process” (members may find the presentation on the ITFA website), which highlighted the fact that the concerted intervention of the banking and insurance industries in reaction to the PRA was fruitful. The PRA modified its original view on several points in its revised Policy Statement PS8/19 published in January 2019 in response to the feedback on its Consultation Paper 6/18 of February 2018.

The consultation process was valuable, not only in providing an opportunity to better inform the regulator about the processes and practical use of the non-payment insurance product for trade and transaction banking, but also in clarifying how the CRR should be understood and applied in order to achieve regulatory capital reduction through the use of insurance.

In light of these clarifications, ITFA has reviewed its guidelines on the structure and content for CRR compliant non-payment insurance policies, (originally published on 3 August 2016,) taking into account changes to English insurance law which came  into effect on 12 August 2016. The revised guidelines also reflect market developments following the implementation of the Insurance Act 2015 and other recent regulatory statements such as the European Banking Authority (EBA) report on the Credit Risk Mitigation Framework, published in March 2018. ITFA members can view the revised guidelines by clicking here.

The most significant changes as a result of the PRA’s clarifications can be seen in the amendments to: the ‘’Definitions of the Waiting Period’’, which now refers to the PS8/19; to §3.5, which deals with exclusions in insurance policies; and to §2.8 which now takes into account the PRA’s guidance on the expression “clearly defined and incontrovertible”.

The guidelines also now include an Annex providing some market-standard wording for certain clauses, including those relating to nuclear exclusions and sanctions.

The guidelines were produced by ITFA in partnership with its Insurance Committee members and the association’s legal advisers, Sullivan & Worcester UK LLP.