The Spanish Government has – with the approval of Royal Decree-law 15/2020, of 21 April, on additional measures to bolster the economy and employment (“RDL 15/2020”) – authorised the Consorcio de Compensación de Seguros (“CCS”) to reinsure entities operating in credit and surety insurance. The measure is aimed at bolstering financing for companies given the likely containment of the reinsurance market, which will have a negative impact on trade credit. The CCS’s intervention already had a positive impact when shoring up the market during the 2008 financial crisis. RDL 15/2020 points out that "it is necessary to guarantee the continuity of financial transactions and to afford security to commercial transactions in a climate of uncertainty such as the current one"; a climate in which the insurance sector will certainly be vital.
According to the CCS’s Legal Statute, the body – which is a public insurance entity – can exceptionally underwrite reinsurance when doing so is advisable in the general public interest. This goes beyond of the body’s usual insurance-related functions, such as providing coverage against extraordinary risks, holding the Guarantee Fund for motor insurance and handling the liquidation of insurance companies.
The aim of the measure is to convey calm to credit insurers with considerable exposure and whose insured clients are domiciled in Spain. The measure is due to apply until the grounds of general public interest that justified the measure disappear, although subject to a minimum of two years. The measure will also apply retrospectively to insurance transactions offering cover from 1 January 2020 onwards.
Although the measure is aimed at credit insurance and surety, the scope only includes credit insurance transactions, making no specific reference to surety transactions.
No details are yet known of the cover involved, which must be approved by the Board of CCS. However, the provision establishes that the standard contractual instruments in the reinsurance market will be used, while the economic terms must ensure the long-term financial balance of the agreement. The terms must also include the management expenses incurred by the CCS.
The precedent of the 2008 financial crisis
A sharp rise in default as a result of the 2008 financial crisis triggered the CCS’s first intervention as credit reinsurer to mitigate restrictions in the reinsurance market. The CCS’s authorisation to act as reinsurer in 2009 was structured by means of an agreement between the CCS and Unespa (the Spanish Association of Insurers and Reinsurers) , to which most credit insurers operating in Spain acceded.
The CCS’s intervention in that case was structured on a two-tier basis: a pro-rata stake in quota share reinsurance (basic form of credit insurance) on market conditions, and a stop-loss tranche to cover excess claims of between 85% and 130% of premiums.
How have other countries reacted?
On 20 April, the Association of British Insurers (ABI) called for temporary government support for credit insurance by means of temporary reinsurance scheme with the aim of keeping the trade credit market afloat given the massive risk of default that COVID-19 might generate, and to guarantee policy availability.
France on the other hand has obtained European Union approval for a State guarantee scheme for new loans granted by French financial institutions, which will apply throughout 2020.
RDL 15/2020 also authorises the Spanish Insurance Regulatory Authority (Dirección General de Seguros y Fondos de Pensiones) to extend the deadlines and time periods applicable to insurers and reinsurers, including deadlines: for submitting the Periodic Supervision Report for 2020; submitting and publishing the Financial and Solvency Status Report for 2019 and the Special Review Report; and submitting the annual figures or statistical-accounting report for 2019 and the quarterly report for the first quarter of the 2020 financial year.
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© Herbert Smith Freehills 2021