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Credit Insurance and Credit Information

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by

Michelle Bijo

on 23 February 2014

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Transcript of Credit Insurance and Credit Information

Insurance Company
Insured Company
Customer
= Supplier/Creditor
= Buyer / Debtor
Delivery / Invoicing
Oders / Payment
Credit Insurance & Credit Information
Indemnity
Premium
Credit Information / Prevention / Monitoring
Insurance Contract
Debt Collection
{
Credit Insurance
Born at the end of 19th century.
Developed in Western Europe between the wars
Manage the political risk of export on behalf of their state.
3 groups cover approx. 85% of global credit insurance market.
Main players:
Euler Hermes (merger between 2 credit companies of Allianz Group)
Atradius (merge between NCM and Gerling Kreditversicherung)
Coface (part of Natixis group)
Actors:
The Insurer and The insured (some cases
the seller/bank)
Export credit agencies

Risks
Commercial Risk
Rests with the buyer’s ability to pay
Bankruptcy or insolvency
Default of payment for any reason other than product dispute
Political Risk
Associated with buyer’s country
Government preventing release of funds
War/Revolution
Cancellation of import license
Inconvertibility of currency

Credit Information
Electronically systemized information recording details and history of companies.

Gives insight into a company or party’s creditworthiness.

Information is accumulated by the various financial service providers and entered into the dynamic and regularly updated database.

The information includes: financial state and payment records of the companies.

The information is either exchanged between the providers or sold by “credit bureaux” (specialized companies in credit information).


Private Sector Insurance Market
vs.
Export Credit Agencies
USA EUROPE
Different Forms of Insurance / Guarantees

Application Procedure
1) Preliminary response
Oral or Written form
While seller is in the early process of discussing or preparing the offer

2) Conditional offer
Upon request by the seller, certain terms and conditions
When preparing an offer or a tender for contract
Fixed for a period of 90-180 days
More detailed, specifying the cover and premium

3) Confirmation of conditional offer and issuance of insurance policy
When contract is secured, external approvals
Specifies final details and terms and conditions
Validity of 90-180 days-to allow time for fulfillment of all outstanding conditions
Conclusion
+
_
Covers G&Ss exported to the most developed OECD countries on credit periods of
maximum 2 years
.

Standard insurance covers the delivery of G&Ss
production period up to delivery is optional

Main risk =
commercial risk
Political risk can be added
If higher commercial and political risk: documentary payments (≠ open account)
For non OECD countries with higher risk: Bank guarantees (L/Cs)

Premiums: Individually determined and vary a lot
Based on several factors
risk assessment, customer relations, the volume of business generated, competition
These premiums are, however, relatively small compared to the potential losses…

Main objective of official ECAs:
Supplement private insurance market by assuming credit risks that this sector is unable/ unwilling to accept at competitive terms.

Government-backed

Short-term (6m-2y) but mainly long-term (+2y)

Higher default rate 10 times more claims

"OECD Arrangements on Officially Supported Export Credits"
= "Consensus" = "Arrangement"
restrict the potential for governments to use their ECAs to offer too favorable conditions
For most OECD countries: ECAs are only allowed to cover the
commercial risk on periods of more than
2 years.
For other countries: No restrictions

Premiums: Lower than other fianancial tools, but sufficient to cover the risks
(commercial & political), and operating and financing costs
Credit risk is assumed by the
creditor's bank
Banks can transfer the risk to the
credit insurer
Export Credit Insurance
Protects an exporter against the risk of non-payment
In case of default insurer pays up to 95% of the customers debt.
--> seek to collect the costs from the buyer.
Goals:

1. Protects the insured from foreseeable losses and maintain profitability.
2. Reduce payment; covers commercial and certain political risks.
3.Cover currency unconvertibility, expropriation and changes in regulations

ECI are offered either on single- or multi-buyer basis
Offers competitive open account terms to foreign buyers
Risk for creditworthy buyer to also default on payment
If the risk is reduced, the exporter can increase his sales.

ECI does not cover physical loss or damage of goods shipped to the buyers

Advantages
- Known, calculable costs
- Economic security

- Claims are done rapidly and professionally
- Access to valuable credit information
- International network with local representation

-Higher borrowing capacity
- Expanding sales to existing customers
- Developing sales into new international
markets
- Professional credit
management
Not just an insurance Clients are offered combined services that should reduce the risks
COVERED RISK:
Percentage of coverage, or inverted, the uninsured percentage that the seller is not allowed to lay off to any third party

The qualifying period
The period before settlement of the claim takes place

All aspects of non-coverage should be gone through with insurer
Whether delivery is in one or more shipments
Whether buyer is to pay in one or more part-payments
Whether separate credit terms are connected to the deal



UNCOVERED RISK:
Credit insurance offers protection when other tools to assure payment aren't available.
Insurance can be used as a back up for the seller, even if the buyer's bank already issued an L/C.
Securing insurance limits risk.
Credit insurance isn't always available.
Can limit a sellers ability to accept orders from certain potential customers.
Sellers are required to maintain with transparency their books and accounting methods, for insurance to be granted.
In case of non-payment by the buyer through dispute regarding seller's terms of sale or quality of goods delivered -> credit insurance unlikely to pay until dispute is resolved.
Advantages
- Higher risk capacity
- Can be used in risking emerging
countries

- Can be used for long-term (mainly)
- Lower rates
- OECD Arrangements
1. Introduction
2. Credit Insurance & ECI
3. Credit Information
4. How it works
5. US vs. EU
6. Private Insurance vs. Agencies
7. Application Procedures & Conclusion
Content
Full transcript