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Credit and political risk loss adjusting 2020

Getting ready for a claims spike

Credit, Political Risk and Terrorism
COVID 19 Coronavirus

By Claire Simpson | July 16, 2020

Understanding the Loss Adjustment process

A perfect storm of COVID-19 (coronavirus), low oil prices and an uptick in political violence has led the credit and political risk insurance market to brace itself for a marked rise in claims. Recently we invited Tim Bradford, CEO of Leadenhall Adjusting Ltd, to speak to our financial institution clients about the political and credit risk loss adjustment process and how best to prepare for a claim:

Understanding the Loss Adjustment process

  1. Loss adjustment is essentially an audit process, required in approximately 90% of cases by insurers to fulfil the requirement for an independent review of a loss.
  2. Policies will normally have an outlined Claims timeline which you should be familiar with to ensure the claims process is as painless as possible.
  3. The loss adjuster will want to understand the totality of the bank’s relationship with the defaulting obligor. For claims, the adjuster will request a clear chronology of events from the start of the relationship with the obligor through to when the bank first became aware of issues on the file. They will also want to understand what the bank did once issues presented themselves.
  4. Recoveries remain a crucial strand of how insurers view credit and political risk deals and so it is often useful for the distressed asset team members to participate in the loss adjuster meeting.
  5. It is worth reviewing policy wordings to make sure that template release documents are attached as this avoids what can be protracted negotiation over what should be a simple receipt.

Areas to watch

Two key areas that can threaten a positive claims outcome:

  1. Non-disclosure and misrepresentation by the bank through the withholding of key information which prevents the insurer from truly understanding the nature of the risk underwritten.
  2. Legal enforceability of the debt, a key clause in the wording and insurers want to see that a debt is enforceable. Where borrowers have been fraudulent insurers will want to make sure that the bank undertook customary due diligence, wordings are clear, and that the debt was legal and enforceable at policy inception to the best of the client’s knowledge and belief.

Fortunately for financial institutions in many cases claims are paid in full and on time (Market Claims Collaboration Exercise 2020). Mediations and arbitrations are rare, as the market is not a litigious one and values the depth of its long-term client relationships.

Conclusion

In summary, Tim Bradford has explained that the growth of the Credit and Political Risk market has raised the expectation that the post COVID-19 claims spike will be larger than that of the Global Financial Crisis. Insurers and loss adjusters are making contingency plans and hiring staff to ensure claims continue to be serviced on a timely basis.

As well as an uptick in claims from Asia, perhaps as this is where COVID-19 hit first, Tim Bradford reported the emergence of fraud of the underlying obligor. Forged documents, forged signatures and false accounting has led to considerable levels of unreported debt being uncovered when company’s collapse. This as well as the dramatic movements in commodity prices, particularly in the oil sector may also increase the number of potential credit and political risk losses.

The market is standing ready for the claims that will follow this year’s upheaval and is expected to perform well. Indeed, after the Global Financial Crisis the market grew with more customers, more demand and more capacity.

Political risk index spring 2020

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