When you boil down the evolving dynamics within trade finance, they all attempt to tackle uncertainty and insecurity. And this makes credit insurance more critical than ever.

In recent years, banks and credit insurance providers have had to rethink their strategies in response to growing complexity, tighter regulation, and the increasing demand for capital efficiency. These forces have driven a move towards new risk-sharing and distribution models, transforming how banks manage their trade finance assets.

To learn more about the current state of credit insurance in trade finance, Trade Finance Global (TFG) spoke with Marcus Miller, Managing Director, Global Lenders Solutions Group Leader, Credit Specialties, and Marie-Aude Vesval, Global Unfunded Risk Participation Leader, Credit Specialties at Marsh.

The evolving role of regulation and credit insurance in trade finance

Regulation has long been a driving force behind banks’ strategic decisions, particularly in the trade finance sector. The regulatory landscape, influenced heavily by Basel III, continues to shape financial institutions’ portfolios, requiring them to optimise the balance between capital efficiency and profitability. 

These changes place an increasing emphasis on the quality and structure of banks’ assets, with more stringent capital requirements pushing institutions to seek ways to more effectively manage credit exposures across their balance sheet.

In this context, credit insurance can be a very effective tool in managing these regulatory pressures. Eligible credit risk mitigation techniques allow financial institutions to shift risk off their balance sheets and reduce the capital burden associated with holding trade finance assets. 

Miller said, “There’s definitely a move back now to shorter-dated assets and secured assets that have great performance history. Industry stakeholders have worked hard to position trade finance as a high-performing asset class evidencing low default rates.”

Traditionally, banks focused more on originating and holding assets to maturity, benefiting from yield generation. However, as regulatory demands have increased, it’s become clear that alternative approaches are required.

Credit insurers have responded by offering more scalable and efficient solutions that help banks reduce their exposure to risk and manage capital constraints, enabling them to continue providing trade finance, maintain profitability and satisfy their regulatory obligations. 

Credit insurers generally have good appetite for shorter-dated, high-performing assets that are viewed favourably under regulatory frameworks such as Basel III. This shift’s success is primarily due to the favourable default rates associated with trade finance, which have helped position it as a reliable and low-risk asset class.

Originate-to-distribute model and risk-sharing

In parallel with the regulatory landscape, there has been a significant move towards what is known as the “originate-to-distribute” model in trade finance. 

This model is to the growing demand for capital efficiency, and represents a shift from banks originating assets and simply holding them on their books to a more dynamic approach where banks distribute risk across a broader network of investors and insurers. 

Miller said, “Having the ability to dynamically manage portfolios through risk sharing and risk distribution serves and makes it more resilient in the wake of financial shocks.”

Vesval added, “Portfolio solutions could be a way for banks to distribute higher volumes of guarantees in a more efficient way.”

In the originate-to-distribute approach, insurers offer committed capacity and pre-agreed eligibility criteria, providing banks with a more predictable and scalable solution for distributing risk. The result is a system that is faster, more efficient, and better equipped to handle the demands of modern trade finance.

Insurers have refined their approach to meet the needs of the originate-to-distribute model, focusing on reducing execution risks and providing more reliability on pricing and appetite. 

The ability to offload risk quickly, without waiting for insurers to determine pricing and appetite, has allowed banks to instantly distribute risk, improving the speed and flexibility of their operations and maintaining a competitive edge.

Master risk participation agreements (MRPAs)

Another growing trend in credit insurance is MRPAs.

Initially developed as a bank-to-bank product, MRPAs are now used more frequently in trade finance — often as an alternative to traditional credit insurance — and allow banks to share trade assets with participants on both a funded and unfunded basis.

Vesval said, “Insurers can also issue MRPAs as an alternative to credit insurance. So, they would have similar effects, both MRPAs and credit insurance would respond to non-payment of the bank’s client.”

One key advantage of MRPAs is their ability to act as on-demand guarantees. MRPAs offer faster execution and less conditionality than traditional insurance products, which makes it an attractive option for banks looking to minimise execution risks.

In practice, MRPAs have found two main areas of application with insurers: financial institution programmes and performance guarantees. 

In large financial institution programmes, MRPAs allow banks to distribute assets to insurers, multilaterals, and other banks, all under the same terms, MRPAs usually being placed on widely used industry templates.

For performance guarantees, MRPAs allow banks to distribute them into the surety market by mirroring the obligations of the underlying bank guarantees, which will enable them to better manage the growing capital requirements associated with such guarantees.

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Credit insurance and financial institutions are adapting through regulatory compliance, risk distribution, and innovative tools like MRPAs. 

The pressure from regulatory bodies, particularly under frameworks like the proposed Basel IV framework, has forced banks to rethink their asset management strategies. The shift towards an originate-to-distribute model reshapes trade finance, with risk sharing becoming a central component of modern banking strategies. 

Credit insurance, once a niche product, has become essential in enabling trade finance to function at scale, even in the face of regulatory pressures and market volatility. 

These developments will continue to shape the future of trade finance as institutions seek ever-more efficient ways to manage risk and capital in an uncertain world.