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Supranational Banks: Pure Captive Insurance As An Alternative Risk Transfer Solution
Capital requirements and relief
Supranational Banks need to maintain specific levels of regulatory capital to act as a buffer against financial volatility. Further to growing regulation in this area, banks are facing increasing challenges in relation to both the quantity and the quality of the regulatory capital they are required to maintain. One way to mitigate this capital requirement pressure and benefit from capital relief is through insurance. Bank capital relief transactions enable banks to use the capital markets to shed some of their risk by buying credit protection on a portfolio of loans. The transaction “insures” a portion of the risk associated with the loans, thereby reducing the amount of regulatory capital the banks are required to hold against the loans, enabling banks to effectively manage their capital requirements while ensuring financial resilience.
Captive Insurance: A Game Changer
The funding needs of developing countries are immense and the UN (Source: UNDP Blog) has estimated that the world will need to spend between US$3 trillion and US$5 trillion annually to meet the Sustainable Development Goals (SDGs) by 2030. The supranational banks are doing an amazing job, providing the required support, development, economic boost, and stability to the developing countries.
Insurance is key for banks by insuring part of their loan books, thereby enabling them to lend larger amounts and at the same time achieve capital relief. However, insurance cost sitting in the statement of comprehensive income is a significant chunk of a bank’s expenses and keeps on increasing year on year. Achieving the right balance is important and this is where the innovative and sophisticated vehicle, the Captive Insurance Company, comes in to revitalise the way of doing business.
A Captive Insurance Company, being an insurer, can bring efficiencies to banks within the group structure by underwriting credit risk on part of the loan portfolio. This strategy not only supports banks in managing costs effectively, but also help to build, in the medium to long term, a solid technical reserve that can be redeployed for further investments and consolidate the financial strength of the Captive Insurance Company as well as the Group company.
Case in Point: Trade and Development Bank
As a reference, one of the Supranational Banks, namely The Eastern and Southern African Trade and Development Bank, also known as Trade and Development Bank, took the innovative step to establish their Pure Captive Insurance Company in Mauritius. The Captive Insurance Company will help by co-providing in-house coverage solutions for the group and subsidiaries, hence achieving greater risk management efficiencies. Important achievements (Source: Annual report 2022) for year 2022 included:
- 125% increase in turnover and 153% increase in Net Profit year on year;
- USD 240 million insurance coverage was provided to the bank; and
- Good geographical spread covering several countries.
Innovation with a touch of boldness
With the speed of how demand is increasing, how fundings are required, how people want to emerge from their standard of living and how the countries want to expand economically on the national and international level, businesses need to embed new technologies, new products/solutions and do business in a bold manner. All Supranational Banks have a common mission and are usually established to promote economic development in their developing or regional member countries, to facilitate regional integration or to expand cross-border trade. Having a Captive Insurance Company can act as a catalyst to boost the development as well as the growth of the group.
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- Office 215, Block B, The Junction Business Hub, Calebasses, Mauritius
- (230) 245-9773