Reflections on the CPRI market through crises
Sian Aspinall, managing director of BPL Global, reflects on the CPRI market as we venture into 2022 amid the events in Ukraine and as the market emerges from the pandemic. Resilience and fundamental stability should continue to underpin the sector.
It is difficult to take stock of events over the last few weeks in Ukraine without a profound sense of sadness. It is not for us to rationalise what is at a human level indefensible. We can look to history and geopolitics for explanation, for mistakes in diplomacy and missed opportunities to diffuse tensions but fundamentally the impact on humanity is all-consuming and may shape our lives for years, if not generations to come.
For that reason, we won’t look to put figures on the economic impact to the CPRI market. Any scenario planning in such unprecedented circumstances would be merely speculative and likely misleading. We have never experienced such swift wide-reaching sanctions accompanied by unity across much of the world in implementing them; but the consequences to markets are yet to fully unfold and the dominoes yet to fall.
Falling back on fundamentals
Therefore, when we assess the impact to the CPRI market and the resilience of the insurance industry, we really need to fall back on the fundamentals. Two months ago, when I committed to contributing to the Berne Union newsletter, the intent was to focus on the state of the CPRI market as we emerged from the impact of the pandemic. More recently, I questioned the value of doing so given the swift change in recent events. However, on reflection it is probably as relevant now as it was then; if anything, far more so. The resulting impact to a market of any heightened risk uncertainty is as much based on the health of that market when volatility strikes as it is on the nature and size of the jolt. So, how would we assess the CPRI market as we venture into 2022?
Much has been reported on the speed in which the CPRI market regrouped in the early shockwaves of the pandemic. After a short period of inertia while insurance carriers took stock, people steadily regained their nerve and managed through. Initially both new business volumes and quote rates were down but over those first six months the market adjusted to the new risk environment as appetites from insureds and insurers realigned, though there was a longer lag until pricing expectations came back into closer harmony.
That realignment was brought about through greater communication between all stakeholders, not only between insureds and insurers but behind the scenes between insurers and both their senior management and their reinsurers. Existing portfolios were evaluated and stress-tested and due diligence on new business by both client and insurer increased. Arguably, though we could never have known it at the time, the experience may have equipped the market well for the circumstances faced today.
A market in maturity
Having completed our annual market capacity survey back in January across almost 70 different insurance companies and Lloyd’s syndicates what is evident is that the overall headline figures haven’t really changed when mapped against the prior year. This could be interpreted that the market has stagnated but actually, beneath the surface, the position is far more nuanced and speaks to a market in its maturity.
Over 2021 there were a small number of high-profile insurer withdrawals that created headlines in our specialist CPRI world and in doing so distorted the significance. However, their absence hasn’t even shifted the overall market dial. Had the likes of Zurich left the CPRI class 10 years ago it would have been significant to the CPRI market’s scale and capability, both in terms of their line size and the types of transactions and tenors they could embrace. Now, remarkably they and their fellow retractors leave no noticeable market void. The space has been seamlessly filled by others; either in the form of brand-new entrants such as Convex, Vantage and Tierra or by existing players increasing their capabilities. All achieved within a short-term horizon. This reaffirms the maturity of the market, with a natural ebb and flow around the edges but with a stable and robust core.
That stability is maintained through continued support from the reinsurance market. Reports of the 2022-year reinsurance renewals for the direct insurers were relatively smooth. This reflected the benign claims environment experienced last year, in stark contrast to early pandemic predictions, enabling insurers to focus on refining their offerings and match client requirements more closely with the terms of their reinsurance arrangements. This is demonstrated in the example of Project Finance, with greater overall capacity available (a 10% increase on 2021) but also, crucially, where such capacity is provided over extended average policy periods to match the natural returns on investment. This is particularly useful when supporting renewables and the overall energy transition where growing capacity out to 20 years is required. Such a shift would not have been feasible without the support of the reinsurance market garnered via the strong track records of the direct insurers serving to create trust and confidence in the quality of their risk selection and underwriting expertise.
BPL portfolio as a proxy
As we enter 2022, we assessed our own portfolio to extrapolate as a CPRI market proxy to assess diversification. Managing $55 billion in policy limits for clients, similar in scale to that of a medium sized ECA, the risk diversity across geographies, industries and financing structures is wider now than ever before. OECD volumes contrast with developing economies, and while we have 16% of exposure to Africa (our largest by continent), our largest individual country exposure is to the US followed by the UK.
Within the African continent the exposure is distributed across 32 different countries (though not necessarily evenly!). The tenors are, on average, increasing with over 65% classed as medium to long-term in nature with an average policy tenor of 63 months, thus providing natural hedges against short term liquidity squeezes. In terms of basic structures, 70% would be deemed trade-related or secured in nature, with just under 10% categorised as non-trade such as unsecured corporate lending though this aspect has been growing as the credit quality of the obligors the market sees in this space improves.
The balance of the portfolio is made up of named peril Political Risk or Political Violence insurance on assets or investments. CPRI is being applied to an ever-increasing breadth of financing areas, with 16 different classifications recorded and with quotes received from the CPRI market on over 20 different broad business sector categories. This all speaks to a CPRI market that both attracts and retains widely diversified portfolios.
The wider market’s exposure to the crisis
Though we can look to portfolio diversity in the CPRI market to determine resilience, questions are inevitably asked of the private market in terms of the wider insurance sector’s exposure to the Ukraine crisis in areas such as aviation that could contribute to overall market instability. In answering this challenge, we need to look to the general credit quality of the insurers that participate in the CPRI space.
Comparing the credit ratings of 43 CPRI market insurers as at the start of the financial crisis in 2007 with their equivalent credit ratings as we emerge from the pandemic at the end 0f 2021, only five carriers experienced a one notch downgrade and 15 carriers experienced a one notch upgrade. At no point did any of the carriers’ ratings fall below A- throughout that 15 year duration. It should be noted that all Lloyd’s syndicates were evaluated as one Lloyd’s entity given the S&P rating Lloyd’s benefits from and the mutuality of the Lloyd’s Central Fund. This financial resilience through two of the largest economic shockwaves in recent times is a testament to the effectiveness of Solvency I/II regulation and provides a track record rarely emulated across other business sectors.
Therefore, when asked of the health of the CPRI market as at the start of 2022 and as it embarks on navigating through the latest crisis, though the future is unpredictable, the fundamentals appear pretty sound.
