On August 10, 2022, the Loan Market Association (“AML“), in association with the Lloyd’s Market Association (“Lloyd’s“) and the International Underwriting Association (“IAU“), published a model credit risk insurance policy (“IRC Policy“).
The CRI policy represents the culmination of two years of work by a task force made up of players in the credit insurance market, including law firms, banks, brokers, insurers, Lloyd’s and the IUA.
As explained in the LMA’s user guide relating to the CRI Policy, this policy has been drafted:
- on the basis that it can be used as unfunded credit protection for regulatory capital, as well as for other prudential regulatory purposes;
- with regard to unfunded credit risk protection requirements in accordance with CRR1;
- for the purpose of insuring the risk of a single borrower under a loan agreement, whether secured or unsecured; and
- as a basic starting point for a font of this type, subject to case-by-case customization and subsequent negotiation (in other words, the CRI font will not, without customization, necessarily be suitable for a particular transaction or will provide the required protection).
Why is the CRI policy so important?
As the first insurance policy document produced by the LMA, the CRI Policy is a significant development and historic achievement for the credit insurance market; it represents an important step towards achieving a well-understood and standardized form of documentation for a widely used credit risk mitigation tool. The fact that the CRI policy has been published by the LMA, a trusted industry body, which many banks turn to for model documentation, as well as a working group made up of all the major stakeholders in the credit industry. ‘credit insurance, gives the document reasonable and reasonable credibility. a fair starting point for negotiations, which should reflect standard market positions.
Additionally, market commentators have also noted that the CRI policy will help demonstrate a level of standardization of core terms for banking regulators, which has been a key regulatory concern in the industry.
Finally, and as mentioned in the LMA’s press release on the CRI policy, the CRI policy should provide a recognizable framework and a master key to achieve greater efficiency and standardization in the industry (especially for new entrants), which in turn allows market players to focus on commercial drivers rather than the form of documentation.
The CRI policy is of course not a substitute for expert advice in a sophisticated product domain (nor does it claim to be); all users will need to confirm for themselves whether a credit risk insurance policy (whether based on the CRI policy or otherwise) meets applicable regulatory requirements (whether in relation to CRR or otherwise). ). Similarly (and as the LMA’s press release also points out), the CRI policy is not intended to supersede or supersede terms already negotiated between and agreed to by specific insured lenders and their insurers; it would be inefficient as a “one-size-fits-all” document. These factors do not constitute shortcomings of the CRI policy; however, it is important to recognize – as the CRI policy does – what a model form of this type is intended to accomplish. As the LMA’s User Guide to the CRI Policy aptly puts it, “the model form is intended to form the basis of a sound first draft for the subsequent negotiation of a basic credit risk insurance policyIn other words, there is now something useful and believable on the page to start with, but that will require transaction-specific customization.
If the market adopts the recommended form as a starting point, this could contribute to CRR requirements such as Article 213(1)(b), which requires that credit risk mitigation be “clearly defined and indisputable” and section 213(1)(c), which requires that “the credit protection agreement does not contain any clause whose fulfillment is beyond the direct control of the lender“. However, (a) we expect that many brokers and insurers will continue to prefer to use their own standard form policies rather than this LMA document, at least initially, and (b) the LMA recommended form may not not help with some of the thornier issues in this area, such as the fact that the CRR requires a lender to qualify directly for the credit risk management product, whereas in many syndicated loans it is the agent collateral who is named as the insured rather than each lender.
UK financial regulators have not formally endorsed the recommendation as a means of meeting CRR requirements. However, they consider industry guidance in their decision-making and may view policies that follow the model as more likely to comply with the requirements and policies that are materially different as less likely to comply.
Perhaps more importantly, the recommended form could help the insurance industry sharpen its thinking on what acceptable wording looks like, which could support the availability of CRR-compliant policies in the market.
For more information on the CRI policy, please contact your usual Mayer Brown contact.
1 “CRR” means Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, including insofar as it forms part of domestic law of the United Kingdom under the Union (Withdrawal) Act 2018.