OREANDA-NEWS. Fitch Ratings says in a new report that Italian ABS issuers are exposed to legal risks when the securitised pools contain loans that finance insurance policies in addition to the product purchased with the loan agreement (eg a theft and fire protection together with the purchase of a car).

Typically, the insurance premiums are paid upfront by the lender/originator to the insurance companies and are then repaid by the borrowers as part of the loan instalments. The insurance premium usually accounts for 6%-7% of the outstanding balance of the consumer loan, with auto loans typically having a higher exposure of about 10%. The average size of the exposure across originators has increased in recent years due to lenders' cross-selling efforts which have increased the number of insurance policies "'sold"' together with the loans.

Legal opinions received so far by Fitch have not expressed a view on whether, as a consequence of a default of an insurance company on any of its obligations under a financed policy, a right to terminate the loan agreement, or a right to claim a refund of unearned premium from the issuer, would be granted to borrowers. In the absence of legal opinions, Fitch believes that transactions are exposed to the risk that a borrower may begin legal action following a default by the insurer to avoid repaying at least the part of the instalments that finance the premium, and receive a favourable judgment.

In the analysis of Fitch-rated transactions, the agency has identified a number of factors that affect the materiality of the legal risks facing different issuers and the likelihood and size of the potential loss. The main factors are the creditworthiness of the insurers and the likelihood that a default of the insurer would result in a discontinuation of the insurance protection. When the originator is obliged to indemnify the issuer for loss related to this risk, then also the creditworthiness of the originator is an important factor. Overall, in transactions analysed to date, these and other relevant factors, together with the available credit enhancement, have provided adequate protection. For all other relevant factors Fitch considered in rating recent Italian ABS transactions, refer to linked report above and to the individual New Issue reports of the different transactions.

When analysing transactions with revolving period, Fitch took into account the heightened risk introduced by the revolving period, as the insurance exposures of the initial portfolio could significantly change during the revolving period. The exposure could change in terms of its split among different insurers (due to shifts in the insurance products purchased by the borrowers) and in terms of insurance entities underwriting the policies (due to possible changes in the commercial partnerships of the originator).

The report, Italian Consumer ABS: Potential Legal Risks from Financed Insurance Policies, is available at www.fitchratings.com or by clicking on the link above.