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Credit and political risk insurance (CPRI) has garnered increasing importance in the current volatile global environment. Whilst CPRI used to be a niche topic known mostly to those in the international trade industry, it has garnered increasing publicity. 

To discuss the growing prominence of CPRI, Harry McIndoe and Sean Austin, Directors at BPL, joined Brian Canup in Trade Finance Talks to break down the market and discuss its utilisation by development finance institutions (DFIs) and multilateral development banks (MDBs). 

DFIs and CPRI: Navigating geopolitical and economic volatility together

DFIs’ and MDB’s interest in CPRI is not new. BPL’s work with this client segment began in the 1990s as a special adviser to the World Bank to help set up ATI (now ATIDI), as well as some Eastern European ECAs. However, interest in these markets has increased recently. 

McIndoe said, “In the earlier years, insurance use was somewhat understated. It is now clearly very prominent… [for] some of the insurers that we work with, DFI business represents up to a third of their portfolio…it really is a core part of what people are focussing on.” 

BPL is a major part of this insurance market, providing non-payment insurance on the one hand and on the other political risk insurance to banks, DFIs and MDBs, commodity traders, exporters, and investors. 

McIndoe said, “Essentially, in behaviour, it is similar to a silent risk participation from an A-rated or double A-rated insurer that sits behind the policyholder protecting them from losses on their funded or unfunded exposures.” 

“Most of the activity that we see is on the non-payment insurance side, and the cover there supports or covers non-payment for any reason so has a very simple trigger.”

There is also heightened awareness of insurance with DFIs and MDBs and the market more generally considering the need to mobilise more capital to meet the UN Sustainable Development Goals (SDGs). Similarly, the G20 Capital Adequacy Framework report has underscored the importance of insurance for enhancing lending capacity and enabling DFIs to leverage their balance sheets. 

McIndoe said, “Insurance has come out of the shadows and is a much more relevant product to many DFIs.”

Evolution of CPRI and future opportunities  

While looking at the global geopolitical and economic environment, there is a clear opportunity to expand DFI’s and MDB’s use of CPRI.

Whilst the market has a lengthy history of working with multilateral insurance agencies or export credit agencies providing reinsurance capacity, this has recently expanded to non-payment cover to bilateral development banks and MDBs. 

Austin said, “This has been a means of managing counterparty country or sector exposure, but also importantly, to mobilise private sector capital.” 

A recent OECD report stated that DFIs and MDBs are currently only mobilising about $50 billion of private capital annually – a small fraction of the annual financing gap for achieving the UN SDGs, indicating the scale of opportunities. 

Concerning future growth opportunities in markets such as Africa, historic CPRI market expertise is rooted in supporting emerging market risks, whether PRI or relating to non-payment covers. 

BPL’s portfolio, currently around $83 billion of live limits, comprises approximately 12% Africa weighting. 

Austin said, “If you think about how BPL’s market share stands, we estimate that BPL’s market share is roughly between 15 – 20%. And so the market is carrying $50 billion and upwards of exposure to the African continent. So there’s clearly a lot of risk-taking appetite in the market.”

The recent trends point to better opportunities for the continent, but it helps to have DFI support.

Austin said, “On the basis of covering a commercial bank in relation to more challenging structures or technologies, it may be tricky. But if you have the existence of a DFI or MDB in the equation, that is really going to bring insurance capacity to those sectors.” 

Current conditions in the CPRI market 

To get a broader understanding of the current CPRI market, it is useful to look at the wider property and casualty insurance industry, which has experienced several years of repeatedly high natural catastrophe losses in excess of $100 billion annually. 

This trend is increasing as the effects of climate change intensify. Concurrently, inflation has increased the values of insured assets, requiring insurers to pay out greater amounts. This has meant that capacity has exited the market, resulting in increasing premium rates. 

When looking at the CPRI market – sub-1% of the global insurance market – it is comparatively insulated. Firstly, it is not as exposed to natural catastrophes as it largely insures credit risk. 

Claims also tend to be slightly higher in frequency whilst lower in volume, occurring throughout the year rather than experiencing annual ebbs and surges. Moreover, inflation does not inflate the values of assets as a fixed sum is insured, and pricing has remained markedly static relative to clients’ risk margins. 

McIndoe said, “The market is in quite a healthy place…when compared to the wider market conditions.” 

BPL’s portfolio size of $83 billion has grown by approximately 100% since 2019, reflecting a large widening in usage by existing clients of the market, including DFIs and regulated banks, investors or corporates, as well as newer buyers.

Using BPL’s portfolio size as a proxy for the wider market, its 15-20% estimated market share provides insight into how the broader market is characterised. For example, the number of insured finance asset classes has also expanded from 11 to 20 over the last five years and is likely to continue to grow due to client demand.

Of the $83 billion, 70% is Medium- and Long-Term (MLT) credit risk, including sovereign and private non-payment. Durations range from 12 months to 23 years. 14% comprises political risk insurance (PRI). 16% is trade credit insurance (short term receivables insurance). 

Main challenges and risks facing DFIs when using CPRI 

In 2023, the trade finance gap grew to $2.5 trillion. This raises the question of the main challenges and risks for DFIs when using CPRI to attempt to address the growing gap. Relatedly, there are questions regarding how DFIs can employ this form of insurance in emerging markets. 

One of the challenges facing businesses is the risk profile of their transactions. DFIs and MDBs that have a development mandate on the one hand, whilst CPRI insurers active in the market will have to answer to commercial capital providers. 

Austin said, “So there is clearly a disconnect there. That is not to say that bridge cannot be overcome, but there is a limit to the amount of credit risk that insurers are willing to take, and we just need to be cognizant of that.” 

Another risk for inexperienced DFIs or MDBs when it comes to using CPRI is a lack of understanding of the product or the market. 

Austin said, “It really underlines the importance of using a broker that understands the market and can guide them through the process.” This is particularly important for emerging market experience: assessing a good claims track record, ensuring the goodwill of the insurers, and building relationships with the insurance market on behalf of the client. 

In this regard, MDBs are not particularly different from commercial banks in the sense that insurers want to work in partnership. Austin said, “As long as they embrace that partnership approach and transparency with the market, they should not encounter too many issues.”