Structured Credit

Structured credit insurance protects your business from the failure or refusal of the borrower, for any covered reason, to pay an amount (principal and/or interest) due under an insured loan obligation. It is applicable to a wide range of financial obligations, including loans, guarantees, and documentary credits.

Under a non-payment insurance (NPI) policy, the peril that causes the non-payment event can be very broad, from the insolvency of the borrower to a political risk event that prevents repayment of monies owed. It is available on a secured, non-secured, and trade-related or non-trade (working capital) basis, depending on the underlying contract and other elements of the transaction.

Additionally, it can be used to cover risks in short-, medium-, or long-term timeframes, as would be most relevant to a particular client account, and in both emerging and developed markets. It is sometimes referred to as “contract frustration insurance,” for its ability to decrease the stress associated with non-payment of accounts receivable.

Unfunded risk transfer to private market insurers is an established risk distribution strategy for financial institutions. Using non-payment insurance (NPI) contracts, the non-payment risk of their borrowers can be transferred on a single name basis or as a portfolio.

Unlike credit default swaps, an NPI contract is tailored to the underlying loan obligation. Marsh can provide guidance on how your NPI contract should be structured to qualify as an eligible credit risk mitigation technique under Basel III, which underlines the need for efficient capital management.

There are many benefits to using an NPI contract for borrower risk mitigation purposes.

When you work with Marsh, some of the benefits of our NPI contract — where the insurance market serves as a syndication partner to transfer exposures – include:

• Significant capital relief through risk-weighted asset reduction.
• Increased risk appetite.
• Management of risk concentrations.
• Alternative to sharing with competitors.
• Competitive pricing.
• Increased profitability, return on risk, and return on equity.
• Uncorrelated and non-systemic distribution partners.
• Undisclosed and silent risk participation partners.
• Significant capacity and depth of insurance counterparties.

Any lender that relies on payments from domestic or international business partners, whose ability to pay may be affected by factors like political volatility, economic instability, or trade restrictions, should consider structured credit insurance.

Even when these are not significant concerns, structured credit insurance can be leveraged to expand lending relationships with counterparties, thereby avoiding your borrower needing to source additional funding from your competitor institutions.