Credit Exposure

Industry Questions/Comments

[Sections 71 and 89 to 91 of the Insurance Act 2018]

Guidance is required on what aspects of insurance business are being considered for credit exposure.  Is it only investments or should broker/agent receivables also be considered?  Also, what about bonds issued by insurance companies e.g. performance bonds, demand bonds etc?  Are they also to be considered credit exposure? And how does section 91 (1) impact/intersect with credit exposure requirements?

Central Bank of Trinidad and Tobago

Please refer to the definition of credit exposure in section 4(1) of the Insurance Act, 2018 (Act) and to examples of credit exposures in the Central Bank-issued reporting forms CB105I, together with the corresponding manual for the reporting requirements of credit exposures. 

In a credit exposure, the exposure to risk to a counterparty (such as a borrower, issuer of a security or person guaranteed) is created when, for example, an insurer makes an investment, extends credit or funds or gives a financial guarantee. (Note that the term “guarantee” in the definition of credit exposure refers to a legal guarantee, and not to any form of an approved insurance product such as a performance bond).

Taking those definitions into account, where, for example, an insurer grants a loan, gives a financial guarantee, purchases equity or debt security or otherwise extends credit, the insurer incurs a credit exposure.  Please therefore note the following:

(a) Since insurance products do not involve insurers making, giving or extending investments, commitments, credit or funds, but agreeing to pay the insured contingent on the occurrence of a specified event, insurance products are not credit exposures.

(b) All outstanding broker and agent receivables of any kind constitute credit exposures since they arise through the insurer granting credit. 

(c) Outstanding premiums are credit exposures.

It is further noted that Section 91(1) of the Act requires the insurer to inform the Inspector of Financial Institutions (Inspector) where the insurer breaches the credit exposure limits under sections 89 and 91 of the Act.

The insurer must implement the necessary systems and controls to monitor its credit exposures.  It may be that, during the course of operations, the credit exposure limits may be breached.  In such situations, the insurer must notify the Inspector within two (2) business days of becoming aware of such contravention. 

Further, the insurer is expected to immediately take action to remedy the breach and to ensure that its risk management framework, systems and controls are refined to prevent and/or mitigate against the risk/exposure in the future. Additionally, the insurer’s risk management framework must be amended to ensure that breaches can be identified and brought to the Inspector’s attention in a timely manner as required by the Act.