In October this year, the International Trade and Forfaiting Association (ITFA) published its long-awaited harmonised Basel III-compliant trade credit insurance policy form.

Designed to help banks and insurers negotiate deals, the harmonised form was the product of almost four years of leadership from Scott Ettien, who has led the Basel III Think Tank Initiative since its inception in 2018.

As an ITFA board member and executive vice president at Willis Towers Watson, Ettien was well placed to coordinate with the more than 40 insurers, banks, brokers, and law firms who cooperated to help further standardise trade credit policy in line with Basel III.

The making of harmonisation

In a trade finance transaction, banks often take out insurance to increase their risk capacity and obtain capital relief, if necessary. 

But this process is sometimes complicated by the fact that banks and insurers each have their own unique Basel III policy forms.

As Ettien said at the launch of the new ITFA Basel III-compliant policy form in October, its main aim is to create more insurable opportunities in trade credit, while at the same time saving legal costs and time for all parties.

“Banks and insurers have held tight to their own negotiated form,” said Ettien. 

“All negotiated forms are confidential, so comparison is difficult. Countless hours are spent negotiating forms, with most of these – if not all – landing on similar wording. 

“These protracted negotiations are expensive and time-consuming and frustrate all parties, especially the bank customer seeking advantageous balance sheet treatment. 

“Furthermore, the market is constrained, as not all insurers accept a specifically negotiated bank Basel policy, thus limiting the capacity levels the bank can acquire, with their form, in the credit insurance market.”

With harmonised wording between them, the banks will then be more free to focus on capacity and pricing. 

Likewise, insurers can focus on offering competitive services and ratings, rather than tinkering with policy wordings to distinguish themselves.

Moreover, policy standardisation will help increase the trade credit industry’s procedures around capital relief.

“Consistency, predictability, and a reliable form is paramount to regulatory bodies further recognising trade credit insurance as a viable risk transfer mechanism for capital substitution,” said ITFA Chairman and CEO Sean Edwards. 

“We need all banks, insurance companies, law firms and brokers moving in the same direction if we are to grow the overall industry,” he added.

Harmonisation impacts

One of the biggest challenges to implementing harmonisation in practice is, as Ettien puts it, the fact that “nobody likes change”.

Ettien points out that when trade credit insurance forms are negotiated, this can be a huge expense in itself, which encourages those at the negotiating table to dig their heels in.

“By spending that and getting it exactly the way you want it, it’s not easy to move somebody off of that position,” he said.

“So we’re looking at the main problems that are coming in, with capacity being needed more and more, and with these deals being bigger and bigger.”

This problem becomes even more tricky when we consider that, often, no single insurer can provide the required capacity, so insurers have to syndicate, and banks have to take part too.

“You could have upwards of 10-20 parties on one contract, and you can’t have 10-20 different forms managing that.

“So there’s going to be a form that everybody can agree to, and that’s the whole idea of this policy harmonisation.”

It is important to note, however, that while its efficiencies may be clear in theory, the use of the harmonised policy form is nonetheless optional.

“We’re not forcing anyone to change, but as things start to move down the line and more capacity is needed, we’re going to have to go to more and more carriers to syndicate.”

As an example, Ettien points to the exit of both QBE and Zurich from US trade credit insurance this year, which will leave behind a more fragmented marketplace of smaller players.

The exit of two of the market’s largest firms will also leave behind a $20 billion capacity shortfall, according to a statement by ITFA. 

Harmonisation adoption

Looking at the harmonised policy form’s fastest route to adoption, Ettien believes that getting insurance brokers on board will be key.

“I really think brokers really need to come together, as the brokers really drive the market with their customers,” he said.

“And here if we can start, collectively, to move forward and say this is what we really want, and this is how we’re going to start, we can really streamline these negotiations.”

Ettien expects some teething pains from the industry, but his lessons from the Master Risk Participation Agreements (MRPA) of 2008 and 2009 – from the Bankers’ Association for Finance and Trade (BAFT) and ITFA respectively – could be instructive.

“I think eventually, over time, you’ll see that, just like the MRPA that was resisted at first, but over time it gets socialised and people start to look at that document.

“But also, if you’re looking at the new banks, more banks are going to come into the space that have never used trade credit and capital relief.”

“The biggest issue – if you’re a new bank – is all the forms that have been negotiated, they’re all under NDAs [non-disclosure agreements].

“So having this reference point is very good guidance to be able to say, okay, I want to get into the space, and here’s an industry body that’s done a lot of the homework for me to be able to jump in.

“And, it’s a very fair, very balanced contract.”