Navigating change: the implications of Basel IV and AI

Liberty Mutual Re’s Uwe Haug examines a period of significant change for the credit (re)insurance industry.

The credit (re)insurance market has experienced significant shifts recently, driven primarily by new global banking regulations and advancements in AI.

The introduction of Basel IV, a package of reforms developed in response to the 2008 financial crisis, aims to standardise global banking rules and strengthen the international banking system. Basel IV began its phased implementation last year and is set to be fully effective by January 2025.

Banks, as major buyers of credit and political risk insurance (CPRI), are significantly impacted by Basel IV, creating a ripple effect for both primary insurance and the reinsurance sector. These regulations present a dual challenge for banks: they pose strict additional requirements for policy offerings but also drive increased demand for credit insurance.

Tougher requirements and increased demand

Basel IV imposes stringent conditions on policy wordings and exclusions. To qualify for capital relief, banks must adhere to these requirements, creating challenges for underwriters. (Re)insurers face the tough task of aligning regulatory demands with the core principles of insurance, and must strike a delicate balance to remain competitive.

Conversely, Basel IV has spurred increased demand for credit insurance. According to the provisions of Basel IV, banks can now gain capital relief on specific loan transactions by purchasing credit insurance and can therefore lower their risk-based capital requirements by transferring some of their credit risk to insurers. This surge in demand has led banks to insure asset classes and loan transactions without prior loss experience, passing on some of their risk to (re)insurers. This trend has prompted a noticeable migration of bankers into roles as credit insurance underwriters or analysts within the CPRI market.

Growth and opportunity

This has already led to marked growth in the CPRI market, with new players entering the industry to meet the rising demand and intensifying competition. As things stand, banks in the US are not eligible for this credit relief, but many are hopeful that the regulations will change in the not-too-distant future. If such changes occur, it could unlock a huge new market for CPRI products in the US, further boosting the industry's growth and relevance.

Despite the challenges imposed on underwriters through changing bank regulations such as Basel IV, the increase in demand has been welcomed by the (re)insurance industry. As such, many feel that the credit (re)insurance market is well-positioned to thrive in the years ahead, offering valuable solutions to banks and businesses in an evolving regulatory landscape.

Technological change

Looking at the short-term trade credit market, the focus is more on rapidly evolving technology than on bank regulation. Digitalisation and the use of AI are allowing insurers to rethink ways of automating the underwriting process and enhancing risk management capabilities, allowing them to be more efficient and responsive to market needs.

This is not only important in providing better service to existing clients but is also generating much debate and discussion around ways in which these technological advances could help the industry tap much deeper into the SME market, a customer segment with very low credit insurance penetration and serious growth potential. If successful, (re)insurers stand to streamline their operations, reduce costs, and unlock new profits.

While the credit (re)insurance industry is undeniably facing a period of significant change, Liberty Mutual Re and the market at large are well-positioned to adapt and to embrace these changes. Basel IV and technology are set to spur further growth. It will be exciting to see how these factors play out in the coming years, but there is no doubt that the future of the industry is bright.

Uwe Haug is Liberty Mutual Re’s head of underwriting strategy and business development – financial risks reinsurance