Credit Insurance (eBook)

Miran Jus (Autor)

eBook Download: PDF | EPUB

2013 | 1. Auflage
186 Seiten
Elsevier Science (Verlag)
978-0-12-411505-7 (ISBN)

Infos

This monograph is practically oriented, presenting a survey and explanation of credit insurance services for protection of short-term trade receivables primarily against commercial risk of insolvency and protracted default. The subject matter (i.e., main functions, features and principles of credit insurance with detailed description of credit insurance coverage, insurance conditions, and credit insurance policy management) follows procedural stages and presents commercial, financial, legal, and practical points of view which emphasize the needs of both the providers of these services and their clients - existing and potential credit insured companies - as well as other practitioners. - Explains how credit insurance has changed from an esoteric type of property insurance into a flexible and frequently used credit risk mitigation tool used on a global basis - Compares credit insurance with self-insurance and equivalent substitutes - Describes the types of insurance available and how to obtain and manage credit insurance policies

Miran Jus, Ph.D., is the Executive Director for Structured Financing and Legal Affairs at Korona Power Engineering, Inc. He also serves as an Assistant Professor of Finance at the University of Ljubljana.

Textauszug

Chapter 3

Basics and Principles of Credit Insurance

3.1 MAIN FEATURES AND CREDIT INSURANCE TERMINOLOGY

3.1.1 Short-, Medium-, and Long-Term Credits

3.1.2 Supplier and Buyer Credits

3.1.3 General Insurance Principles

3.1.4 Whole Turnover Insurance and Insurance of Individual (Specific) Transactions

3.1.5 Main Features of Credit Insurance Cover

3.1.6 Prices of Insurance Services

3.1.7 Pre- and Postshipment Risks

3.2 BASIC PRINCIPLES AND CREDIT INSURANCE CONDITIONS

3.2.1 Insured Events—Definitions in Insurance Conditions

3.2.2 Trade Receivables Insured

3.2.3 Commercial and Noncommercial Risk Insurance

3.2.4 Claim Payment

3.2.5 Conditionality of Credit Insurance

3.2.6 Obligations of the Insured

3.2.7 Percentage of Cover

3.1 Main Features and Credit Insurance Terminology

3.1.1 Short-, Medium-, and Long-Term Credits

In contrast to the term export finance, used in international trade for financing of larger transactions, exports of goods and services, especially capital or quasi-capital goods, equipment, and civil works that require crediting exceeding the term of 1 year due to their nature, for the financing of exports of consumer goods, spare parts, raw materials, and semifinished products, the expression trade finance is used in international trade, which usually designates short-term crediting (mostly credits and loans with a tenor of 90 or 180 days and up to 1 year, exceptionally even 2 years) or sales on deferred payment terms. The bulk of international trade consists of such exports. According to estimation, as much as 90 percent of the world’s trade is conducted on the basis of cash payment at delivery or on short-term credits.

Essentially, this book concentrates and deals with the latter, that is, short-term commercial credits or business-to-business (B2B) trade receivables, and not with medium- (mostly 1 and 2–5 years) and long-term credits from 5 to 10 years and more. It mostly deals with short-term credit insurance against commercial and other marketable risks, which may be ceded by the primary insurers to the global private reinsurance market.

3.1.2 Supplier and Buyer Credits

Supplier credits are commonly used for short-term crediting and are extended by suppliers (exporters) to their buyers (importers) while the refinancing may take place in the form of invoice discounting or by, for example, assignment of the proceeds arising from credit insurance policy rights. As illustrated in Figure 3.1, in this traditional and straightforward model, the seller contracts goods and/or services to the buyer and the credit terms are included in their commercial contract.

1. Exporter concludes the insurance contract with the credit insurance company and pays the insurance premium.

2. Exporter’s bank (based on the assignment of the insurance policy rights—1a) grants the credit to exporter/purchase accounts receivable.

3. Exporter delivers goods to buyer on deferred payment terms.

4. Buyer or his commercial bank—guarantor (4a) effects payments of the amounts due.

5. If the buyer does not repay the credit, or the commercial bank acting as a guarantor does not pay, the credit insurer pays claim to the exporter (or to the exporter’s bank on the basis of assignment of insurance policy rights—1a).

Figure 3.1 Supplier credit. See text for details.

Buyer credits for the payments to suppliers are approved by the seller’s or exporter’s commercial bank to the buyers or their banks (on-lending to a client); sometimes this may be in the form of general purpose or project line of credit, either for export of variety of goods and/or services or for the needs of a particular large project. This main technique is usually used for medium- and long-term export credits. In addition to a commercial contract between the exporter and the importer, there is also a separate and parallel loan agreement concluded between their banks. The exporter is paid by its bank mainly on a cash basis by drawing of the loan after the commissioning or completion. The borrowing bank, backed by the agreement with the importer, then repays the loan to the lending bank, for example, in a preagreed loan period after the completion. Figure 3.2 illustrates the process and relations between the parties of the underlying commercial contract, banks involved in the transaction, and the credit insurer.

1. On the basis of credit contract with a foreign buyer (1a) or its bank (1b), the exporter’s bank concludes an insurance contract (1c) with an ECA and pays insurance premium.

2. Buyer effects an advance payment to the exporter.

3. Exporter delivers goods according to the commercial contract and/or performs services.

4. Bank approves credit disbursements according to commercial contract, that is, it pays the exporter.

5. Buyer or his commercial bank effects installment payments (principal and interest of the credit).

6. If buyer or his commercial bank (debtor or guarantor) does not pay the debt, ECA pays the claim to the exporter’s bank.

Figure 3.2 Buyer credit. See text for details.

3.1.3 General Insurance Principles

Although credit insurance has some special characteristics, such as long-term and labor-intensive cooperation between the partners and more active day-to-day involvement of the insured in policy management, it is nevertheless founded on the same basic principles as other property insurances as:

– the principle of mutuality and solidarity,

– the law of probability,

– the law of large numbers, and

– dispersion of risks underwritten by the insurer.

Credit insurance is usually an optimal way of ensuring that a loss incurred from any individual payment default is covered by spreading the risk over large population of insured companies (insurance premium payers) where relatively small premiums cover large potential losses.

These economic pillars and specifics are also important for proper understanding of credit insurance legal specifics in comparison with other institutes of law on obligations. Conclusion and implementation of credit insurance contract as a contract of indemnity mostly follows similar general legal principles as in other obligations, as well as other trust-based contracts and other types of property insurance, such as:

– the principle of autonomy or freedom of the contracting party to choose the counterparty, the type of contract, and its contents;

– pacta sunt servanda;

– the principle of good faith (contractus bonae fidei and fair dealing)—already known in Roman law—for the conclusion and implementation of contracts; for (credit) insurance (Rozanes v. Bowen (1928), 32 L.I.L.R. 98) even “utmost good faith” (uberrimae fidei) codified for marine insurance purposes is required (see, e.g., Black King Shipping Corp. v. Massie, The Litsion Pride (1985), 1 Lloyd’s Rep. 437);

– insurable interest;

– principle of indemnity, that is, insurer’s liability is restricted to the actual loss suffered and subject to the insurance contract limits and conditions;

– prohibition of unjust enrichment;

– “all-or-nothing” rule (however, only liability insurance allows the connection of legal contentiousness and liability for damage with the amount of the claims paid), etc.

If the credit insurance should be economically successful, the covered loss-causing events must be relatively independent. Supposing the past experiences are good bases for prediction of future results, the credit insurer must dispose of sufficient insurance capacities, know-how and risk management skills, as well as experience with this business field and track record.

3.1.4 Whole Turnover Insurance and Insurance of Individual (Specific) Transactions

ELIGIBLE TRANSACTIONS. The subject matter of credit insurance is the policyholder’s financial interest in granted short-term commercial credits. Short-term credits are usually given in domestic and international trade for raw materials, consumer durables, spare parts, and semifinished goods, while machinery, equipment, and other capital or quasi-capital goods as well as civil works require longer credit periods. Almost all business transactions are eligible for the insurance of supplier’s short-term credits—all legal trade with tradable goods and/or services. However, some business transactions may not be eligible for credit insurance due to different reasons arising from the traded goods and services (e.g., export of weapons and...

Produkt-Details

• Erscheint lt. Verlag: 26.2.2013
• Sprache: englisch
• Themenwelt: Recht / Steuern ► Wirtschaftsrecht
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung
• Themenwelt: Betriebswirtschaft / Management ► Spezielle Betriebswirtschaftslehre ► Bankbetriebslehre
• Themenwelt: Betriebswirtschaft / Management ► Spezielle Betriebswirtschaftslehre ► Versicherungsbetriebslehre
• ISBN-10: 0-12-411505-5 / 0124115055
• ISBN-13: 978-0-12-411505-7 / 9780124115057