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Tokio Marine's pandemic review unspools into Greensill collapse

Japanese insurer failed to uncover problems at time of taking on policies

Tokio Marine's exposure to Greensill Capital has raised questions about its risk management. 

TOKYO -- The decision by Japanese insurer Tokio Marine Holdings to limit its exposure to Greensill Capital came more than a year after taking on problematic policies covering the British financial group, underscoring shortcomings in risk management.

Greensill, a SoftBank-backed company that specializes in supply-chain finance, filed for insolvency Monday after Credit Suisse Group suspended $10 billion in funding. The suspension was apparently triggered by Tokio Marine's refusal to renew insurance policies protecting Greensill against payment defaults, thrusting the provider into the spotlight.

The first domino fell back in April 2019, when Tokio Marine purchased the insurance underwriter Bond and Credit Co. from Insurance Australia Group. Tokio Marine first noticed problems with the dealings between BCC and Greensill about a year later, in May of last year.

During a companywide review of the repercussions from the coronavirus pandemic, Tokio Marine discovered that a BCC underwriter insured amounts exceeding his authority. By rule, such arrangements would need to be approved by supervisors.

A month later, in June, Tokio Marine enhanced its oversight mechanisms and began training employees to prevent a reoccurrence. In July, the company informed Greensill it would not renew $4.6 billion in insurance policies, which were due to expire March 1 of this year.

Greensill sued Tokio Marine last week to force an extension of the coverage. The courts ruled against Greensill, and the financial group withdrew the suit a few days later.

Tokio Marine has now launched an investigation into whether insurance policies at the heart of the collapse were valid in the first place.

BCC had extended insurance to more than AU$10 billion ($7.7 billion) in trade credit to Greensill. But a German financial regulator said a Greensill unit was unable to provide evidence of some of the receivables purchased from a client. If the receivables were indeed fictitious, that would invalidate the insurance policies.

IAG was the original insurer for BCC, and the group delegated much of the risk to reinsurance companies. When Tokio Marine bought BCC, it assumed the remaining risk held by IAG through reinsurance.

Greensill's bankruptcy would not trigger payouts under the insurance at issue, and the reinsurance policies assumed by Tokio Marine are said to limit the potential exposure. Tokio Marine said it has not revised its earnings projections.

Tokio Marine earnings had suffered due to large payouts for disaster coverage in Japan. The company sought to offset the damage by expanding its overseas operations.

"This highlights the need to pay careful attention to risk management even on a minor target" such as BCC, said Masao Muraki, global financial strategist at SMBC Nikko Securities. "It's the same issue shared with other companies engaged in overseas mergers and acquisitions."

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