Viewing the CPRI market in context
Harry McIndoe, Director at BPL Global, assesses the current state of the CPRI market and finds it to be in robust health.
The credit and political risk insurance (CPRI) market is approaching critical mass. It is in robust health, with a wide and varied field of purchasers and well diversified insurers. CPRI plays an increasing role in the global financing ecosystem – supporting upwards of $500 billion of ongoing trade and investment – and there is widening recognition of CPRI as a core risk and capital management tool for financial institutions. But firstly, it is worth viewing the CPRI market within the context of the wider property and casualty (P&C) insurance market conditions.
After several years of ‘soft’ market conditions, 2022 was characterised by a hardening general insurance market, with rates in certain classes reaching 20-year highs. There were two primary drivers: a steep increase in the frequency and severity of natural catastrophe losses (reaching around $125 billion in 2022, which is well above the approximate $81 billion 10-year average) and inflation, which has increased the values of insured assets. The result: shrinking risk appetite (a number of reinsurers pulled out of the property reinsurance market completely, while others retracted), rising prices, and tighter terms and conditions being imposed on clients.
Reassuringly, the CPRI market remained relatively insulated from these wider market conditions. Widespread concerns that a wave of post-COVID insolvencies would inundate the market with claims, failed to materialise. While Russia’s indefensible war in Ukraine continues to cause human crisis and fatalities on an unfathomable scale; CPRI market losses will fall well below initial estimates, as clients have worked to reduce exposures.
Except for the exit of one small Lloyd’s CPRI book in March 2022 (WRB, whose ‘whole-account’ reinsurance structure fell victim to unfavourable reinsurance market conditions in the immediate aftermath of the Russian invasion), the market has remained very stable. Major losses and inflation concerns outside CPRI make the class look particularly resilient and it is seen as a useful diversifier for insurers, particularly in the context of Solvency II, where ‘Speciality’ classes can provide a capital benefit – positioning CPRI as an increasingly important segment for insurers.
Growth and realignment. Has the market plateaued?
With only one new CPRI market entrant in 2022 (Pernix), and insurers’ maximum theoretical capacity expansion slowing to around 10% year-on-year, you might well ask whether the market has plateaued. Looking beyond these metrics we see a market still very much in growth mode, with clients expanding their use in a truly holistic fashion and insurers relishing exposure to a diversified range of opportunities.
However, it would be blinkered to ignore the lurking latent issues facing the market from places such as Russia, Zambia, Ghana and Lebanon, but its claims payment record suggests it is well-placed to meet such challenges. For a market with an estimated premium income of around $4bn per annum, annual claims in the high hundreds of million dollars are not uncommon. Using 2022 as a snapshot, over $500 million of claims were paid to regulated financial institutions alone, reflecting a 100% success ratio.
*Source A2Z survey 2022.
While headline capacity growth has slowed, this belies the granular picture: the vast majority of insurers continue in expansion mode following the end of the pandemic. Using BPL’s portfolio as a market proxy, year on year enquiry volumes increased by 15% in 2022, and aggregate insured exposure increased 65% since 2020, reflecting a widening of usage by existing mature market clients across a broader range of deal-types, as well as increased new business volumes from newer market entrants. This was largely driven by the capital relief benefit, but the general heightened perceived risk environment cannot be ignored. Importantly though, while volumes have increased dramatically, the same cannot be said for pricing – which has remained largely consistent relative to clients’ own risk margins.
Source: BPL Global, USD portfolio total 2020 to present
Focusing on portfolio composition, the expansion has corresponded with a realignment of insurer portfolios towards a healthier mix of geographies and exposure types. Again using BPL’s portfolio as a proxy, whereas five years ago the bulk of exposure constituted African MLT payment risk (and largely Oil & Gas related), the market is no longer such a close reflection of commodity markets. Today, 47% of the portfolio constitutes Europe and the Americas.
These days, average credit ratings hover around the BBB- to BB+ mark, and appetite and expertise in areas such as infrastructure, telecoms, fund finance, capital markets has escalated. This all contributes to much stabler, more diversified insured portfolios, serving to protect the market’s long term viability. It would be inaccurate to call this a pure ‘flight to quality’, more a broadening of appetite, while remaining faithful to the more traditional contract frustration exposures in trickier countries which were historically its mainstay. A core group of insurers still make this their primary focus and it shouldn’t be forgotten how profitable African nonpayment risk in particular has been for the market over the years, with historically strong pricing and above-average recovery rates.
In addition to broadening diversity, CPRI insurers’ portfolios are becoming increasingly ESG-favourable. With their exposure to catastrophe risk, P&C insurers are commercially in the front line for climate change impact, and this sensitivity permeates down to their CPRI teams. With hydrocarbons historically constituting over 50% of many insurers’ portfolios, ESG-favourable client selection is the main insurer strategy, supporting major CPRI purchasers who are taking a lead position in corporate responsibility. However, approaches differ among insurers (even before the recent NZIA departures) with those at the forefront targeting a reduction to around 10% carbon-positive exposures in the next few years, and others less ambitious, but following their clients’ own journeys to net zero.
Client mix, drivers and portfolios
Commercial banks continue to form a mainstay of the CPRI market, with a number of core clients returning each year, providing historically stable income streams and excellent loss ratios. Banks find themselves very well supported and have historically been at the forefront of product innovation. We can expect commercial banks to remain a core client segment and much work goes into bringing new banks to market.
Multilateral development institutions are finding an increasingly receptive audience. Recognising the crucial role played by these institutions in addressing the estimated global infrastructure gap of around $350 billion a year, and with more institutions coming to market, a handful of insurers reserve much of their emerging market risk appetite for this client segment which constitutes up to one third of some insurers’ premium income flows. The perceived ‘halo effect’ crowds in private sector capital and is being shown to work now for newer multilaterals, supporting greater funding, flexibility and innovation.
Portfolio structures are becoming attractive means for clients with good market track records to distribute risk. There are three main drivers: efficiency, regulatory capital relief and fresh sources of capital. With tens of thousands of single-risk CPRI policies placed annually, bundling risks into homogenous portfolios is vastly more efficient. Insuring portfolios has traditionally been the preserve of the reinsurance (and trade credit) market(s) but we see a growing number of direct players developing the actuarial capability to analyse and structure pools of exposures, including ones that qualify for the (unfunded) Significant Risk Transfer (SRT) categorisation. Marrying the direct market with the reinsurance market and other third-party investors creates a new hybrid market, combining welcome fresh capital and knowhow.
Brokers such as BPL are in a crucial position at the centre of the supply and demand equation: we make it our core focus to service our clients, promoting innovation and bringing a diverse array of assets to market while sustaining its long term viability. There is also a key role for us to play in helping advocate for the market as it continues to emerge from the shadows and gains recognition in its own right, particularly by the regulators.