International Underwriting Association of London (IUA)

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Firstly, as noted in our comments in the attached full response, we would support measures to better outline the quality and status of credit insurance as a CRM, including recognising insurance as a separate UCP category.

Secondly, we would favour amending Article 215 of the CRR (additional requirements for guarantees) to reflect the explicit permission granted in Article 190(a) of the Bank Committee on Banking Supervision’s International Convergence of Capital Measurement and Capital Standards: a Revised Framework for the guarantor to “step into the shoes” of the underlying obligor. This ability is a core function of the credit insurance product, so EBA backing for aligning the CRR approach with the BCBS operational requirements to permit either one lump sum payment or assume the future payment obligations would be beneficial.

Thirdly, we submit that the “new requirement to treat guaranteed exposures under the same approach that the institution applies for direct exposures to the guarantor” should not apply for exposures of the bank as policyholder to insurance companies. This is because it is not equivalent exposure, given the priority claim on insurance companies that banks hold as policyholders (as compared to unsecured creditors). The banks should be able to recognise (depending on the jurisdiction and its respective insurance regulations) the improved LGD of its exposure as a policyholder, based on the risk differentiators noted above.

Finally, insurers’ ringfencing of assets for the benefit of banks as policyholders should be recognised. For example, the 45% LGD under paragraph 70 of the Basel III: Finalising post-crisis reforms (p.66) should be modified to recognise the benefit to banks as policyholders, rather than unsecured creditors, of an insurer.
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We would suggest that the Draft Guidelines are unclear on this point and that further clarification would be useful. Additionally, we would raise that both Option 1 and 2 presented in paragraph 34 (and Figure 1) of the Draft Guidelines are in conflict with the normal contractual arrangements regarding the allocation of cashflows from the obligor between insurers and banks using credit insurance for UCP. The approaches presented may therefore require added consideration and we would be happy to provide added information on this if needed.
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We would argue that banks should be permitted further discretion on LGD for exposure to insurance companies. Paragraph 29a.ii of the Draft Guidelines requires that banks using the substitution approach should substitute both the PD and LGD risks parameters with the PD and LGD of a “comparable direct exposure to the guarantor”. However, this should not apply where the exposure of the bank to the protection provider is as policyholder of an insurance policy, as the exposure is not comparable, as policyholders are in a privileged position compared to unsecured creditors, in the same way that depositors have preference over unsecured creditors in a bank structure. Consequently, we think a lower LGD should be considered where the bank’s exposure is as policyholder.

This is also a concern that should be addressed by the EBA in responding to the Call for Advice of May 2018 (Section 2.4.5), regarding the “new requirement to treat guaranteed exposures under the same approach that the institution applies for direct exposures to the guarantor”.

We would make a further point in relation to Paragraph 35c. of the Draft Guidelines, “the degree to which the guarantor’s ability to fulfil the contractual obligation under the unfunded credit protection agreement is correlated with the obligor’s ability to repay can only result in a conservative adjustment of the grades, pools or LGD estimates.” We submit that this should beamended to address situations where the credit protection is provided by non-payment insurance, given insurers are highly regulated entities with diverse liability portfolios, stringent solvency requirements and ringfenced capital to guarantee policyholder protection, allied to low correlation risk with the default of the obligor.
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Joe Shaw