ITFA Press Release – KPMG Insurance Insolvency Study

KPMG study proves that Solvency II increased resilience of Europe’s insurers and shows value of the preferred policy-holder status

A new study from KPMG, commissioned by leading trade finance industry body ITFA and a group of other associations, has revealed the robust nature of European insurers, and the positive contribution of regulations – most notably the Solvency II directive – to further strengthening that position.
The results of the study align with ITFA’s long-held belief and recent work in proving to bank regulators that the unique characteristics of credit insurance provided by well-rated insurers under the protection of the Solvency II regime make it a highly secure credit risk mitigation tool for banks.
KPMG’s ‘Insurance Insolvency Study’ is a review of non-life insurance company failures over the last 30 years in seven European markets, including France, Germany and the UK, where the use of credit insurance is widespread amongst banks. The work was commissioned by ITFA, the International Underwriting Association of London (IUA), the Lloyd’s Market Association (LMA) and the International Credit Insurance & Surety Association (ICISA).
The study tracks the size and date as well as value of creditor of every insurance insolvency in each of the seven markets since 1990 and finds that the bulk of failures occurred in the early 1990s due to the dramatic increase of asbestos, pollution and health hazard claims in the US.
The study further notes that the advent of enhanced capital and regulatory requirements introduced by Solvency I in 2004, and expanded by Solvency II in 2015/16, have contributed to a “marked decrease” in the number and size of insurance insolvencies. This means that failures have had less impact and affected fewer creditors since these rules were introduced.
As noted in the study, the Solvency directives established and harmonised policyholder priority in an insurance company insolvency, meaning that banks – as credit insurance policyholders – rank ahead of other creditors, making it more likely that they will be paid in full than would have been the case pre-2004.
The study finds that in all completed insolvencies since 2004, when these regulatory changes were introduced, insurance creditors were able to recover all claims due, thanks to their preferred policyholder status.
“This privileged position that banks hold as policyholders vis-à-vis other claimants makes credit insurance an advantageous and stable credit risk mitigant,” says Silja Calac, ITFA Board Member and chair of its Insurance Committee.  “The bank as a policyholder is guaranteed a privileged senior position in case of the insurer’s insolvency, which is not comparable to the situation of a bank as a lender to the insurer.”
The study notes in conclusion that “the effects of recent regulatory changes and in particular the introduction of Solvency II have greatly increased the financial stability and resilience of UK and other EU insurers”.
ITFA has been actively engaging European policymakers to promote risk sensitivity of the banking regulatory framework even after the finalised Basel III rules for calculating banks’ capital requirements are implemented in Europe. A key area of focus is the proposed input floor of 45% LGD for insurers when computing RWAs based on internal models. One of the angles proposed to European policy makers is to recognise in the transposition of the finalised Basel III regulation that the unique features of insurance justify a lower LGD floor when a bank is a policyholder as opposed to the fixed 45% input floor when a bank has a lending exposure to an insurer to calculate capital saving and / or consumption.
Without ITFA’s advocacy efforts, the risk is high that some of the rules would mean it would no longer be economically viable for banks to insure better rated credit risks. This, in turn, would impact insurers’ appetite to continue offering credit insurance policies and could lead to some insurers deciding to exit this line of business entirely. Should that happen, ITFA believes that approximately €600bn-worth of yearly support to the real economy is at risk as credit risk insurance is an essential facilitator for lending to the real economy, including enabling the financial sector to offer efficient financing to SMEs. ITFA further believes that many European banks will decrease their levels of lending if the risk of non-payment is not mitigated by, and shared with, insurers.
Since 2019, ITFA has been contracting Hume Brophy, a Brussels-based consultancy specialised in European public affairs, to assist it with its advocacy work and to ensure that policymakers and regulators are well-versed in the relationship between banking and insurance, and the interests that ITFA represents.KPMG’s full report, entitled ‘Insurance Insolvency Study: Review of Insurance Company Insolvencies and Business Transfers in Europe’ can be accessed here.

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