On 10 August 2022, the Loan Market Association (“Pictures of LMA“), in association with Lloyd’s Market Association (“Lloyd on“) and the International Underwriting Association (“IUA“), published a credit risk insurance policy (“CRI policy“).
The CRI process represents the culmination of two years of work by a working party comprising stakeholders in the credit insurance market, including law firms, banks, brokers, insurers, Lloyd’s and the IUA.
As described in the LMA user guide related to the CRI Policy, it is written:
- on the basis that it can be used as an unpaid security of debt for financial management, as well as for other prudential management purposes;
- regarding the requirements for the protection of non-performing loan risk in accordance with the CRR1;
- to ensure the risk of one borrower under the credit agreement, whether secured or not; and
- as a starting point for the policy of its kind, according to which you can change the settings and the following discussion (in other words, the CRI Policy may not be appropriate to take action or provide the necessary protection).
Why is the CRI Policy so important?
As the first insurance document created by the LMA, the CRI Policy is a major development, and a great success, for the credit insurance market; it represents an important step toward achieving clear, acceptable documentation of a widely used credit risk mitigation tool. The fact that the CRI process was published by the LMA, a reliable industry organization, which many banks look to to provide template documents, together with a working group that includes all stakeholders in the credit insurance industry makes the document reliable and relevant. the starting point for the discussion, which should reflect the market situation.
In addition, market commentators said that the CRI process will help to show the number of key points to the bank regulators, which has become very important for the industry.
Finally, and as explained in the press release of the LMA regarding the CRI Policy, the CRI Policy should provide a clear framework and boilerplate to achieve efficiency and stability for all companies (especially for new entrants), which allows market participants to focus more. on commercial operators instead of text format.
CRI’s policy is not, of course, a substitute for professional advice in the area of technology (and does not claim to be); all users will need to verify for themselves whether the credit risk insurance (whether based on the CRI Policy or not) meets the regulatory requirements (whether it is CRR or not). Similarly (and as indicated by the LMA press release) the CRI Policy is not intended to replace, or interfere with, the terms previously negotiated, and agreed upon by, insured borrowers and their insurers; It would not be practical if a “one size fits all” document. These factors do not constitute a violation of the CRI Policy; it is important to acknowledge – as the CRI Policy does – what the nature of the species aims to achieve. As LMA’s user guide to the CRI Policy clearly explains, “The model form is designed to be the basis of a clear written document for negotiating basic credit risk insurance.“. In other words, there is now something useful and reliable on the market to start with, but it will require special changes.
If the market takes a legal form as a starting point, this can help with CRR requirements such as Article 213(1)(b), which requires that credit risk reduction be “clearly defined and indisputable” and Section 213(1)(c), which requires that “debt security agreement does not contain any clause, the fulfillment of which is outside the direct control of the borrower“. However, (a) we expect that many brokers and insurance companies will continue to prefer to use their policies in the forms instead of this LMA document, especially at first, and (b) the official LMA form will not help with the difficulties some of the issues in this area, such as the fact that the CRR requires the borrower to be able to borrow directly under the item of credit risk management, while in most joint loans, it is the security agent who is named as the insurance party and not any borrower.
The UK financial regulator has not accepted such approvals as a means of meeting the requirements under the CRR. However, they consider the direction of the company when making decisions and are able to make decisions that follow the model to fit the requirements and policies that are very different from those that cannot.
Perhaps most importantly, the standard form would help the insurance industry to establish its own vision of what the standard term looks like and what would promote the availability of CRR-compliant policies in the market.
For more information about the CRI Policy, please contact your Mayer Brown contact.
1 “CRR“Means Regulation (EU) No 575/2013 of the European Parliament and the Council of 26 June 2013 on the prudential requirements of credit and investment businesses, including as part of the domestic legislation of the United Kingdom with the support of the European Union. Union (Withdrawal) Act 2018.