What is the product?

Credit insurance is an important tool at banks’ disposal. By insuring the credit risks posed by their clients’ payment obligations, it makes it easier for banks to lend against these assets. Banks that use insurance can put less capital aside against the finance extended, which increases their lending capacity.

Environmental, Social, and Governance (ESG) issues are front and centre for the world’s biggest banks. As credit insurance continues to align itself to banks’ needs, the market has also now started to respond to some of the emerging ESG lending mechanics banks are rolling out under this fundamental shift.

How does it support green outcomes?

In some cases, banks’ financing facility agreements provide for fixed price ratchets (the margin increases / decreases) depending on the counterpart meeting specific carbon dioxide emissions threshold conditions. The credit insurance solution may be structured to include the same price ratchets linked to carbon emissions.

How does it enable customers today?

A bank client required cover for a multi-billion dollar facility with respect to a borrower in the transportation sector. The financing agreement provides for fixed-price ratchets depending on the counterpart meeting specific carbon dioxide emissions threshold conditions. Aon worked with insurers to mirror the price ratcheting of the bank’s finance facility into the insurance premium mechanics. This is a specific new development in the credit insurance market and all parties worked together to design this specific product feature. Under the financing and the related credit insurance, the transportation company is financially incentivised to limit its carbon dioxide emissions. Price ratcheting based on ESG KPIs within the credit insurance industry is expected to open the door to other positive initiatives and innovations going forward.