The past 12 months have inevitably been characterised by the wide-ranging impacts of the COVID-19 pandemic and the effects of measures put in place by national governments to slow the spread of the virus. With respect to credit insurance, however, the pandemic has simply accelerated trends already well entrenched prior to COVID-19’s onset in Q1 2020.
In fact – as BPL Global’s annual Market Insight report highlights – the overall CPRI market in 2020 is a story of resilience, with steady aggregate capacity and number of active CPRI insurers, coupled with strong client enquiry levels.
Figures from our latest capacity survey highlight that, despite the economic turbulence and uncertainty caused by the pandemic, maximum per-risk capacity has remained stable in 2020 compared to the two previous years.
There has been a marginal increase in capacity for non-payment private obligor risk with maximum per risk capacity now standing at US$ 2.4bn , while the amount of capacity still available for tenors of seven and 10 years remains similar to last year’s survey. What is more, capacity for non-trade private obligor risks has broadly held up at US$ 1.7bn per risk, with only a marginal reduction this year, despite some commentators speculating the likelihood of a significant decline.
Overall, the CPRI market remains dominated by bank buyers and their use of the non-payment product. For three years running, 100% of claims made by banks and financial institutions have been paid in full. This has led to some US$3.7 billion being settled to such entities between 2007 and 2020 across the entire market, with BPL Global alone handling 26% of these claims by value.
Nevertheless, despite these encouraging results, CPRI insurers have unsurprisingly seen decreased appetite this past year to cover risks in sectors most negatively affected by COVID-19, such as hospitality, retail and aviation.
ESG to the fore
Yet COVID is not the only topic under discussion in the CPRI world. Another growing theme is that of sustainability and environmental, social and governance (ESG) issues – all increasingly central to stakeholders’ long-term strategies. With the next United Nations Climate Change Conference (COP26) in Glasgow later this year (we hope), demand for coverage on renewable energy projects is expected to increase, and the CPRI market will be expected to meet these requirements.
The long-term nature of project finance (PF) deals means they are modelled to mitigate market volatility and an economic downturn. So, while the overall number of enquiries in 2020 fell by 9% from 2019 to 2,247, the proportion of project finance (PF)-based enquiries remained stable at around 10% of the total figure.
Of these, some 32% of PF enquiries received were linked to the power sector, and two-thirds were specifically related to renewable energy projects. In particular, we have seen growing demand for coverage for both onshore and offshore wind farm projects across Asian and OECD counties. Meanwhile, solar projects have attracted demand for cover across the United States, Australia, Chile and parts of Southern Europe.
The majority of these enquiries in 2020 comprised comprehensive coverage for banks and financial institutions, although we also saw a smaller number of political risk insurance policies for corporate clients investing in or financing these projects.
Growing interest in renewable projects not only allows insurers to diversify into other areas of the energy sector, it also fits into their wider ESG strategies. Indeed, many large banks – especially in Europe – are purposefully allocating more liquidity to support renewables projects. Meanwhile, insurers are increasingly embedding their own ESG initiatives and targets beyond asset-side investment decisions and into their underwriting.
Plugging the gaps
Elsewhere in the CPRI market, political violence (PV) insurance has been affected by recent market hardening in the property space. This has resulted not only in a recalibration of pricing, but also in restrictions in policy terms and conditions, creating narrower coverage in conventional property programmes.
Over the course of the previous 12months, the pandemic and its ensuing economic shockwaves, along with numerous protest movements, have visibly strained relations between authorities and sectors of their populations and fuelled political instability. Combined, the resulting risk levels require that corporates protect themselves with adequate insurance coverage.
PV insurance focuses specifically on property damage and business interruption caused by opponents of the incumbent government, such as protestors, rioters, terrorists, insurgents, rebels and rival powers. This form of coverage is not typically included in general property insurance due to the “war risks exclusion” – as such, PV insurance fills an important gap in traditional property policies.
What’s more, a well-structured PV programme should be highly tailored to the corporate’s needs, with a clear focus on the exclusions present in their existing property insurance cover.
Innovation in terms of wordings and coverage levels has been increasing as of late, although much work remains to be done. What is certain is that this dovetailing approach between property and PV programmes is essential for those corporates seeking a seamless protection against political violence events.
The full impact the pandemic has inflicted on the CPRI, and indeed wider insurance markets, remains to be seen. While there may be varying estimates, this is complicated by the fact it is difficult, at this stage, to assess whether a loss was a true “Covid-claim” or a pre-existing fraud or commercial issue.
Certainly – despite the pandemic and hardening insurance market – the CPRI sector has remained resilient, with steady aggregate capacity and numbers of active CPRI insurers. Overall, while some have fared better than others, we believe that the market has done its job in continuing to meet clients’ demands.
What’s more, although the CPRI market remains dominated by bank buyers and their use of the non-payment product, new and evolving trends in the ESG space, along with ongoing developments in the PV market, have set the pace for continued innovation and growth of the CPRI sector in the years to come.