EBA says no need for LGD on credit insurance claims

EBA has published an Opinion on treatment of credit insurance in the prudential framework. It has previously consulted on credit risk mitigation for institutions that apply the IRB approach with own estimates of Loss Given Default. Feedback had focused on exposures to the insurance companies under the IRB approach without use of own estimates of LGD, given that the Basel III reforms disallow use of own estimates for exposures to financial institutions, including insurers. As a result, the regulatory values of LGD need to be used where the effects of credit insurance used as mitigation is recognised by substitution of risk parameters.  Respondents said this was overly punitive given the higher seniority of claims under policy insurance over other claims towards insurers.

EBA has decided there should not be a specific value of regulatory LGD for credit insurance claims. It says most claims in unwinding proceedings would benefit from the higher seniority priority with the result that if an insurer fails, its policyholders may still suffer significant losses, and there is no evidence that these losses would be significantly lower than the currently applicable LGD values.