While the global non-payment insurance (NPI) market is estimated to be worth more than $160bn, APAC-domiciled banks account for less than 15% of this total, says WTW, a leading global advisory, broking, and solutions company.
NPI is an insurance product that protects against the financial consequences of default by a counterparty such as a borrower, guarantor, or another party to any debt instrument (including loans, bonds, derivatives, and project finance, for example).
In an article posted on its website, which is titled “Why APAC banks should consider non-payment insurance”, WTW says that there are good reasons why APAC banks have shown little interest in NPI. APAC banks have not faced the same regulatory imperatives on balance sheet strength as their Western counterparts. In any case, the region’s banks have historically been well-capitalised. This has also meant the availability of a very active secondary bank market for distribution. Awareness and understanding of NPI have therefore been lower than in other Western markets.
Reasons why banks should turn to NPI
Today, the case for APAC banks to add NPI to their risk management toolset looks increasingly strong. Not least, the economic and commercial backdrop suggests a new approach to managing credit risk may now be needed. The real estate crisis in China has already seen property companies default on $140bn worth of dollar bonds – and there is expected to be more bad news to come. Other APAC markets are beginning to worry about similar sorts of problems as the contagion spreads.
There are also other arguments for APAC banks to turn to NPI.
For example, the nature of lending in the region is changing, with banks increasingly expected to consider asset classes like subscription financing, NAV financing, margin loans and private credit, that might once have been well beyond their risk appetite. The structure of deals is changing too, with leveraged finance becoming increasingly common. NPI can help banks participate in new asset classes or with larger holds while remaining comfortable with their exposures.
Moreover, the rapid expansion of private credit funds into APAC is increasing competition across the region. Banks must fight hard for every transaction – NPI could be a key factor in their ability to remain competitive.
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