Howden Re Outlook at 1.1 Political Risk and Trade Credit

Set against a broader (re)insurance market facing a volatile loss environment, waning prices and exposure growth, credit and political risk (CPRI) is an often-overlooked opportunity in which a subset of insurers and reinsurers are currently achieving exceptional results. 

“Few (if any) other areas of the market have a comparable record of (out)performance and stability,” Phil Bonner, Managing Director, Global Specialty Treaty, Howden Re said. 

Average loss ratios for the reinsurance market have run at a ~55% in the 15 years since the global financial crisis, which itself was only a mild catastrophe event for the credit and political risk market. Even the series of economic and geopolitical shocks in recent years – COVID-19, higher inflation, wars in Ukraine and the Middle East – has done little to hold back performance. 

Strong underwriting standards are limiting losses flowing into the market despite the prevalence of hot conflicts around the world. High demand for protection is reflective of the hostile operating environment confronting many businesses and lenders globally but perceived complexity and a desire to operate in a narrow window of volatility has led to a long-standing supply / demand imbalance (i.e. not enough supply to meet demand).  

Despite the high demand, several entrenched barriers are preventing the CPRI market from reaching its full potential and expanding beyond its ~US$50 billion premium base. In addition to muted carrier appetite, many underwriters perceive the product as esoteric with high headline risk and perceived correlation to the asset side of insurer balance sheets. In addition, CPRI suffers from narrow reinsurance support with only a handful of recognised lead underwriters. 

“Several important developments have occurred post-COVID, which taken together, suggest that the CPRI opportunity is coming back into focus with accelerating speed,” said Bonner. “Several balance sheet start-ups have appetite to write the product, tapping into much needed new sources of committed capacity, though a leadership vacuum remains. Ratings upgrades, including for Lloyd’s, have expanded the universe of counterparties that banks are most likely to seek protection from.” 

New underwriting talent is also entering the market, including from the banking sector (bringing an understanding of the loss environment that has held back commitments previously), often joining MGAs with the ability to leverage multiple sources of third-party paper.  

“This new talent and new tools have coincided with the rise of structured credit, by far the fastest growing portion of the market, and a segment contributing a significant driver of outperformance in recent years,” Bonner said. 

The insurance sector has learned from past experiences and has grown by developing structures based on a strong alignment of interest with banks. This alignment ensures that both parties are equally invested in the success of the credit structures, leading to more robust and reliable outcomes for all parties.  

Banks have also increasingly used structured credit insurance as an alternative and efficient source of capital, further enhancing its appeal to insurers and adding another important purchase motivation to that of risk management. The rise of structured credit has not only driven outperformance but also provided a framework for sustainable growth and resilience in the CPRI market.  

Reinsurance renewals at 1 January 2025 proceeded as expected, with modest changes to pricing and terms on XoL and pro rata programmes.  

“Quite rightly, results continue to dictate cedents looking for improvements in the economics or the structure of their reinsurance purchase,” Bonner said. 

Although this remains a capacity constrained line of business, progress is being made as carriers look to lean into a market which has a strong (and long) track record of outperformance, brings diversification benefits and has an ability to manage losses through what remains an environment of perceived high-risk and strong fundamental demand.