Non-payment insurance (NPI) policies are contracts issued by insurance companies to institutions seeking a form of credit risk mitigation for their third-party liabilities (such as obligations under a credit facility). These policies constitute unfunded, uncollateralised credit protection that provide full recourse to the insurer for the insured sum.
In this article, we discuss in particular:
- How NPI may qualify as a form of financial guarantee under the Capital Requirements Regulation 575/2013 (CRR); and
- How NPI compares to other forms of unfunded credit protection such as credit default swaps (CDS).
Key Points:
- The application of non-payment insurance (NPI) has been extended to provide cover on complex, specialist structured financial risks.
- NPI may qualify as a form of credit risk mitigation (a financial guarantee) under the Capital Requirements Regulation provided that the relevant conditions thereunder are satisfied.
- Whilst NPI policies may not be as readily available as Credit Default Swaps (CDS), they may provide equally tailored coverage and coverage in circumstances where there is no readily available liquid CDS market.
Click here to download a full PDF version of Non-payment insurance: a regulatory capital solution.
This article was first published in Butterworths Journal of International Banking and Financial Law.
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