Winner: Granular Portfolio Insurance Product

The Granular Portfolio Insurance Product (GPIP) has won Innovation of the Year in this year’s SCI Capital Relief Trades Awards. This product is the first insurance structure of its kind and was developed by BNP Paribas (the bank), Liberty (the insurer) and Howden (the broker).

This innovation is in response to various operational limitations when using credit insurance for the bank and at a time when credit insurance is increasingly used as a method of capital relief. The GPIP has given BNP Paribas an efficient and scalable means of distribution, marking an improved and an additional tool beyond existing, traditional, single risk insurance structures. Alongside this, GPIP creates a strong platform for insurers to further transition from underwriting single assets to a batch of assets, while maintaining important structural features embedded into that market.

One of the key drivers to finding a solution was to reduce the high cost of sourcing assets eligible for insurance that comes from the extensive legal due diligence required prior to any placement. This can be on aspects like confidentiality and prior consent limitations on each loan facility, which can impact insurability, and the outcome of this due diligence often results in less than 50% of target assets being eligible for insurance and materially impacts the efficiency of sourcing assets.

Insurers on a single risk basis traditionally require receipt of a comprehensive information package on each asset or facility too, which places another heavy burden on the bank in terms of time and resource. Historically, this has meant the bank would exclude granular assets that were too small in exposure (or RWA savings), as the cost of sourcing eligible assets versus the capital benefit derived from insurance was too high.

BNP Paribas, Liberty and Howden worked together to deliver a product that addressed these constraints while also ensuring critical requirements for both the bank and the insurer were met.

The ability to build the right portfolio with the right asset mix was key to meet the insurer’s needs in terms of concentrations and premium. For the bank, important criteria included pari-passu and ground-up coverage under one unified policy, thereby consolidating all the insured limits within the portfolio. A single policy means much more efficient post-inception policy management for all parties.

The policy tenor matched the maturity of the underlying assets, in order to be compliant as an eligible credit risk mitigant, with premium based on actual exposure of the insured portfolio rather than on each and every insured facility, thereby optimising premium management.

To alleviate the legal due diligence normally required, disclosure of obligors was limited to those critical to insurers, with unique arrangements for ongoing disclosure drafted into the policy, as well as other changes to typical single risk policy features that blended infrastructure from other types of portfolio risk transfer trades while simultaneously allowing the use of multiple distribution challenges (e.g., securitisation and insurance). This optionality for BNP Paribas significantly improves its ability to dynamically manage RWA of any given asset.

The insurer used its capabilities in portfolio modelling, structuring and analysis to: overcome the challenges that arose in the requirements of the transaction; achieve a more attractive premium; and apply meaningful capital against the portfolio. The insurer also benefitted from access to high quality, investment grade granular assets, filtered through stringent eligibility and concentration criteria.

Howden facilitated the balance between the needs of the insurer and the bank to close this inaugural deal for the industry.

In summary, this new hybrid product integrates the strengths of insurance with certain securitisation features when structuring the portfolio. This allows BNP Paribas to open up credit insurance to new portfolios of granular assets not normally accessible under a traditional single risk approach requiring an asset-by-asset review. The product can also be used in parallel with other distribution channels, thereby maximising the capital relief achievable on a given asset mobilised for distribution.

Thomas Alamalhoda, head of resource and portfolio management at BNP Paribas, comments: “The co-design of the GPIP is the result of a solid historical partnership, whereby portfolio approach and optimisation features bring efficiency and growth on both sides.”

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.