What is credit and political risk insurance?
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Turbulent world? There’s an insurance product for that. It’s called credit and political risk insurance – and here’s why corporates, investors and (re)insurers should consider it, now more than ever.
We live in rocky times. The world is grappling with challenges from all corners – geopolitical tension, financial market flux, trade uncertainty and supply chain recalibration – and the surprises keep on coming.
Businesses and government agencies want protection from tomorrow’s news, so they can trade and invest with confidence. The answer is credit and political risk insurance, or CPRI.
And, while buyers are catching on, as an industry we’re not reaching our full potential to support customers because many don’t understand or even know about CPRI.
This article aims to put things right, with a simple breakdown of CPRI product types, and how they work for different people.
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Read our latest report on the credit and political risk market: Opportunity in flux
What’s special about CPRI?
The first thing to understand is that CPRI is unlike other insurance products; it’s as much a financial tool to optimise return on capital proactively as it is a contract to indemnify losses after an event.
Strategically deployed, CPRI pays for itself by enabling greater transaction volumes, increasing margins on existing deals and generating returns that more than offset premium costs.
What are the different products – and for who?
CPRI includes a diverse and sophisticated range of product lines, each with a distinct purpose and set of buyers.
Trade credit
Trade credit insurance indemnifies businesses from various forms of (short-term) non-payment, including insolvency and protracted defaults that stem from commercial and political risks.
It also facilitates financing. By using analytics of large, proprietary financial and claims databases to predict customers’ missed or late payments, it helps corporates decide who they can safely sell to on credit, and how much to extend. Protection allows sales to reach clients who may otherwise be deemed too risky without cover in place.
Non-payment
Structured credit, or non-payment insurance (NPI), gives banks, traders, corporates and public agencies a highly customisable tool for a variety of risk and capital management purposes. For instance, banks are increasingly turning to (long-term) NPI to extend credit to clients requiring additional financing but where sector limits have been reached and secondary loan markets provide insufficient liquidity.
Political risk
Political risk insurance offers coverage against losses stemming from political actions (e.g. asset appropriation). This can reduce the country-specific element of the discount rate applied to projections of future cash flows from an emerging market project, and increase the net present value (and transparency) of future cash flows. It means buyers can take credit for cover being in place from the point of inception.
Why choose Howden?
For businesses and investors, today’s market dynamics demand the very best intermediary expertise and influence: experience, market-leading thought leadership and unrivalled relationships with (re)insurers.
Our CPRI team is here to provide just that. We look forward to supporting clients through this period of instability, and working on their behalf to secure the best coverage available in the market.