18.08.2022

How can banks work with the new LMA model CRI policy?

Last week after over two years of consultation, discussion and negotiation with stakeholders we saw the publication of the Loan Market Association’s (LMA) model credit risk insurance (CRI) wording designed to cover the credit risk of a single borrower arising from a loan agreement (CRI Policy) to complement the LMA’s suite of model loan documentation. Significantly, two major industry bodies representing insurers, the Lloyd’s Market Association (Lloyd’s) and the International Underwriting Association (IUA), assisted in the preparation of the CRI Policy. The LMA has also published a User Guide for its members to use in conjunction with the CRI Policy.

A key driver for this initiative is the use by banks of credit insurance as unfunded credit protection under applicable Basel regulation and the CRI Policy has been prepared with this in mind. The User Guide provides a commentary and overview (based on implementation of Basel regulation in the EU and UK) of, inter alia, how the CRI Policy meets relevant eligibility requirements.

Balancing the position and interests of banks and insurers to achieve a published template endorsed by industry bodies representing both parties was no small endeavour.

Banks who are long established users of credit risk insurance have already in place policy wordings that have been negotiated with insurers over many years to meet their internal requirements and regulatory capital needs. These terms will not necessarily form part of the CRI Policy. The LMA is therefore clear in its publication that the CRI Policy is not intended to override or be a substitute for terms already negotiated by those banks with insurers. Further, as stated in the publication, “the CRI Policy is a basic starting point for a policy of this type, subject to case-specific customisation and subsequent negotiation” and “omits several features which are commonly negotiated between parties from time to time”.

The CRI Policy contains a number of square bracketed options which represent different options for the drafting that may be available depending on a number of factors, including the transaction.

Banks who have not previously used credit insurance or have limited experience with the product and are considering adopting credit risk insurance as a key risk distribution tool using LMA documentation should work with their Broker who will be best placed to help explain the impacts of the options embedded in the CRI Policy as well as any other potential features which may be negotiated.

This LMA CRI Policy is the second published credit insurance template, the first having been published in October 2021 by the International Trade & Forfaiting Association covering single named buyers.