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.
Harry McIndoe
Harry McIndoe
Director, BPL Global

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.

Looking forward

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.

More BUlletin Publications

Charting a course forward


Charting a course forward: Navigating AI, digitalisation, and economic support amidst unprecedented global change

This May edition of the BUlletin offers fresh insights on embracing and implementing digital strategies, adopting AI tools to enhance efficiency and security, supporting the Ukrainian economy by helping keep trade...

Celebrating 90 years of supporting trade and investment


Celebrating 90 years of supporting trade and investment - 1934 - 2024

Reflecting on Berne Union’s origins and celebrating its achievements. What does the future hold?


Climate Working Group: The continuing momentum for change


Climate Working Group: The continuing momentum for change

The Berne Union’s Climate Working Group is proving a helpful forum for sharing good practice. How is it progressing, and how can our industry continue to help with this initiative?

Claims: Controling Chaos, and Risk Versus Reality


Controling Chaos, and Risk Versus Reality

In this edition we explore BU claims data and its relation to predicting risk since the pandemic, we also feature a broker's eye view of the state of the CPRI market, the bold restructuring of Denmark's investment and export financing with EIFO, how EDC is looking at ESG risks and ...

Landmark modernisation for OECD Arrangement


Landmark modernisation for OECD Arrangement

A bold agreement for the Arrangement marks a positive development for our industry. Also featuring
digital access to export finance for China SMEs, challenging the 'China debt trap' narrative for Africa,
insolvency trends, analysing service ...

What's on the horizon for 2023?


What's on the horizon for 2023?

The pick of key issues to look out for in 2023 – from macro trends, potentially choppy seas for smaller ECAs,  possibilities for using Islamic finance in the renewable energy transition, China’s reopening, a bumpy CPRI outlook, and reinsurance complexities. 

Authors look at...

Digitalisation as a business leadership imperative


Digitalisation as a business leadership imperative

Technology-driven trade and client interaction are nothing new. But increasing investment in digitalisation of fundamental business processes and decision making is driving a new way of looking at trade finance and risk underwriting. Authors highlight successes and challen...

Mobilising Africa's Potential


Mobilising Africa's Potential

Despite the challenges there are many positive opportunities emerging for Africa today

Curated by the BU Sub-Saharan Africa Working Group, authors for this special edition of the BUlletin explore areas of growth and the role of different sources of international finance tapping this

Ripples and After-effects


Ripples and After-effects

exploring the multiple secondary impacts of both the pandemic and the war in Ukraine

from sovereign risk in Africa, to energy security, political violence and the private CPRI market

Shocks and Short Circuits: The Rewiring of Global Trade


Shocks and short-circuits: The re-wiring of global trade

The bright shoots of economic growth are under threat once again
Assailed by commodity supply shocks and political instability exacerbated by the war in Ukraine
Contributors this month look at the complex impacts on trade and investment across developed and...

Diverging Risk


Some predict that 2022 may finally bring us beyond the thrall of the COVID-19 pandemic

But the events of past two years have brought significant divergence of risk across economic and geographic boundaries

Authors this month look at how this is playing out in a range of cases

New Foundations


If the global economy is truly on the road to recovery how can we build the surest path to sustainable growth in our new net-zero world?

New foundations in tech, data, and cooperative frameworks may help guide us into the next phase

Illuminating Climate


Now widely recognised as an economic as well as environmental imperative
The momentum to tackle climate change is building
Changing perspectives, policy, products and processes across the export credit industry

In search of claims


Where is the avalanche of claims and insolvencies expected to emerge from COVID-19?
The picture so far is uneven across geographies, sectors and business lines
And for the future? Well, it depends...

Cross-roads for Africa's recovery


The economic impact of the COVID-19 pandemic on Africa has been considerable and the path of recovery depends on maintaining the support of local, regional and international stakeholders. But which approaches can best build upon the opportunities presented by growing intra-regional trade, and investment in sustainable infrastructure?

Navigating the Brave New World of Trade


With the wounds of the pandemic still under triage, a rebound in trade could the best hope for governments and businesses alike.
But trade is under immense pressure from myriad directions.
How can we maintain supply of finance, in the face of growing demand and irregular patterns of risk?