Stephen Taylor, head of structured and capital solutions EMEA at Aon Risk Solutions, outlines the benefits of credit risk insurance for securitisations

Q: What is credit risk insurance?
A: Credit risk insurance (CRI) is used to transfer credit risk to insurers. One of the benefits of using CRI in securitisation structures is that this credit enhances the asset pool (subject to the legal/accounting treatment) and can make the portfolio more attractive to lenders.

Q: How does CRI help optimise a credit portfolio?
A: Our experience of working with securitisation transactions is normally where lenders use CRI across a portfolio of assets. The majority of the securitisation transactions that CRI markets support are where the underlying asset class is trade receivables. Alternative asset classes can be considered and we also have specialists at Aon that structure credit risk transfer solutions across consumer credit portfolios.

Q: Who uses CRI as a tool for credit portfolio optimisation?
A: Banks and lenders will be using CRI as a credit risk mitigant. Third parties that structure transactions and/or utilise their systems to support asset monitoring are also introducing credit insurance into the structuring process to improve the asset credit strength.

Q: Why use CRI over other tools to optimise a credit portfolio?
A: CRI is a flexible product, with growing insurance market capacity. The product is used widely by financial institutions to support lending.

The drivers for using CRI generally fall into three categories: risk management, credit concentration [and] capital optimisation. In securitisation structures, CRI often allows the percentage of eligible assets that are financed to be increased. For example, investors may not want to consider assets from certain geographical locations or may want to discount the value of the asset by a higher percentage without CRI.

If CRI is used across the portfolio, it effectively credit enhances the portfolio to investment grade (being the credit rating of the insurer). Some insurers also have specific securitisation teams that provide structuring advice and access to online systems that can be used to monitor the performance of the receivables.

Q: Has the use of CRI in securitisations become more prominent?
A: CRI has been used to support securitisation structures for a long time. Over the last 18 months, we have seen more securitisation enquiries and have started reviewing requests across a wider range of finance asset classes. 

Q: What are the challenges in using CRI for portfolio optimisation?
A: Securitisation structures can be complex, so it is important to give the insurers sufficient time to properly review and understand the information package and to carry out their necessary due diligence. We would always recommend bringing an insurance partner(s) into the deal at an early stage to follow the deal journey and input into the credit protection structure, rather than being brought in at the last minute, where there is limited opportunity to adapt the underlying structure. 

Q: Which developments will drive a broader adoption of CRI?
A: We believe that there will be continued growth in the use of CRI across all finance asset classes. The CRI markets were traditionally split between multi-debtor and single risk product offerings.

Multi-debtor insurers would traditionally cover short-term trade receivables and single risk insurers were more familiar with loan structures covering multiple asset classes. The trend that we are seeing is a convergence between the multi-debtor and single risk insurer product offering. We are starting to see single risk insurers consider loan portfolios and multi-debtor insurers consider wider asset classes.

While there are always other factors (for example, regulatory [and] economic trends) that could impact future growth, we believe that there will continue to be credit appetite from insurers and sufficient benefits for lenders to use credit protection to optimise securitisation deals.

SP