As the fund finance market continues to grow, banks are increasingly turning to non-payment insurance to manage risk while maintaining strong credit oversight. This trend, highlighted in a recent WTW insight, offers banks greater flexibility in extending credit to funds and asset managers, while providing an effective means of mitigating internal exposure.
For financial institutions, non-payment insurance can serve as a valuable tool for capital relief. By insuring fund finance exposures, banks can boost their lending capacity without taking on additional risk. Often, these insurance arrangements are non-disclosable, meaning the fund manager may be unaware that the bank has transferred a portion of the risk.
The benefits extend beyond risk management. Under Basel regulations, banks can seek capital relief by insuring these exposures with highly rated insurers. This allows them to meet regulatory requirements while maintaining a healthy balance sheet.
Private credit funds, which are becoming increasingly active in the fund finance space, also stand to gain from this strategy. Insurance can improve risk-adjusted returns by effectively upgrading a borrower’s credit rating, thereby offering enhanced security for investors and limited partners, including those subject to Solvency II or NAIC regulations. Unlike co-lending arrangements, insurance allows credit funds to distribute risk without revealing it to investors, creditors, or competitors.
With roughly only 20 insurers active in the fund finance market, selecting the right provider is crucial. Insurance brokers play a vital role in the due diligence process, ensuring lenders meet insurers’ risk criteria. For example, sovereign wealth funds and highly rated asset managers tend to be viewed more favorably than lower-rated family offices.
Interest in insuring net asset value (NAV) lending is also on the rise. This type of lending allows private funds to raise liquidity without selling assets in the secondary market. Though the NAV lending insurance market is still in its developmental stages, it presents significant opportunities, especially for transactions involving unrated or lower-rated assets.
Insurance brokers are helping lenders structure coverage for NAV and asset-backed loans, although fewer insurers are currently active in this area. As the fund finance sector continues to evolve, insurance is becoming an increasingly strategic tool for both banks and private credit funds. By reducing risk and optimizing capital allocation, insurance is providing a competitive advantage in a market experiencing significant growth.
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