Credit insurance: definition and main characteristics

The credit insurance business is a service provided by insurance companies specialized monoline generally, and is based on prior assessment of the buyers by the insurer. Regards the coverage of the risk of permanent loss, originated from insolvency and / or non-payment of short-term trade credits, which have arisen in respect of economic operators, following a contract for the supply or provision of services.

The contract was awarded by the vendor in its own interest, unlike what happens with the Bonds, and provides an overdraft mandatory (the current legislation does not allow the Insurer to provide 100% coverage - generally between 80 and 90%).

Unlike other branches of insurance policies, the signing of the contract does not make it automatic coverage, it is necessary that the supplier remains the formal request of the credit for each borrower (credit limit or the maximum insurable).

It is therefore a type of insurance activity with characteristics than the "basic classes" (can be defined as a "policy of prevention to content indemnity") and requires specialized intermediaries in the specific management.

In summary, the credit insurance is generally composed of three types of service:

• a. insolvency prevention of buyers;

• b. the management of actions good-natured or legal action to recover the receivables;

• c. paying the compensation in case of insolvency of the purchaser.

The credit policy [edit]

The characteristics of the policies credits proposals by insurers are the following:

1 - globality

What in the field of life insurance is the "mutuality" in the credits is determined by the "totality" when a provider want to hedge the risk of insolvency, it is seen by the Insurer ask that all revenues generated over the entire debtor portfolio is subject to premium. The exceptions are usually specific geographic areas (eg covering only the internal market and / or export in certain countries) or lines of business - credit insurance policies usually do not allow the "selection" preventive debtors by the Supplier.

2 - preliminary analysis of the portfolio

The Insurer shall conduct an evaluation of all debtors places in coverage, by selecting the risks unwelcome (usually excluded from the payment of the premium) and determining the maximum insurable for each debtor.

The preliminary analysis of the buyers allows you to restrict the missed payments and the related compensation (and thus the cost in terms of prize): the insurance companies use in the assessment of the debtor not only to public information, but the experiences related to a broad supplier base, generally more complete than is available to the individual provider.

In some cases, the customer is granted the power to determine internally trust lesser amount (the "latitude"), on the basis of publicly available information and / or previous experience of direct sales.

The negotiation with the Company of the credit limit granted to each borrower is the most delicate moment of a negotiation, where the assistance of an [agent] specialist may allow obtaining the required covers the individual customer

3 - revolving the maximum insurable

Once granted a credit limit for a debtor, the credit line has rotary characteristics (such as for castelletti bank), that includes coverage in the credits in chronological order as a result of payments of liabilities by the purchaser. The revolving cease in the event of cancellation by the insurer.

4 - deductibles and maximum compensation

The credit policies, to limit their administrative responsibilities or reduce the amount of the premium, sometimes exclude from coverage losses limited amount (deductibles). There are three types of relief: the absolute excess, the relative and global. They are also usually provided maximum amounts eligible for compensation for annuity insurance (in terms of multiplier than the premium paid).

5 - internal management of non-payment within the agreed terms - recovery activities

Unlike factoring, insurance is not the case with the sale of credit to third parties. It only has the right to subrogation in the event of payment of any claim. Therefore, the Supplier is not divested of ownership of the loan and internally manages the relationship with the client (which is not "notified"). The policies provide for a certain number of days of delay "physiological" than the original maturity date of the credit, during which the Supplier carries in its recovery activities.

Above that limit, the Company must be informed through a Notice of Non-Payment. The policies on the market at this point offer different solutions, some allow the insured to avail the facilities of specialized companies for the recovery, both judicial and good-natured, others require that the insured to perform on its own all the shares.

6 - Special conditions

COVERAGE OF ORDERS CONFIRMED

Sometimes, the cancellation by the Company of a credit line granted in the past to the debtors to the Supplier can create difficulties arising from the start of production of goods manufactured for specific, non-tradable to third parties. In these cases you can negotiate policies that also enable the commissioning coverage of orders, for a predetermined period. This may apply also in cases where the seller is required, under contractual obligations to complete the sale in respect of manufacturing in the meantime become insolvent.

INSOLVENCY OF FACT

Generally consider a credit policies by insurance when it is shown to be legal insolvency of the debtor or in the presence of bankruptcy, but you can negotiate the coverage of so-called protracted default - that is, the claim is dismissed without waiting for the completion of all that is legal acts. This type of insurance policies generally require that the extrajudicial recovery activities are attributable to the Insurer.

FIRST RISK

It is not always possible for a provider to get the credit limit granted by the Insurer on the various debtors are equal to the needs of business, some companies offer the ability to operate "first risk", ie setting aside the traditional pro-rata basis. Even in these cases generally the recovery activity is carried out by the Insurer.

EXCESS OF LOSS

For larger companies, with an internal structure of Credit Management, are offered the opportunity to reduce the cost of the premium through a policy of greater complexity, which makes it possible to ensure only the risk in excess of a global annual deductible (so-called risk "catastrophe") and a threshold and allows greater autonomy in determining the insurable limits for each borrower. The companies generally considered acceptable for this type of insurance coverage for a significant amount of turnover.

POLITICAL RISK

It is usually possible to extend the coverage of export credits to cases of non-payment arising from unilateral decisions of the state where the debtor resides (moratorium, inconvertibility of currencies, removal of import licensing), in which case it comes to coverage of Political Risk .

INTERNATIONAL PROGRAMS

When the needs of receivables insurance cover groups of companies with presence in different countries, it operates through the so-called International Programs, with whom the insurance conditions negotiated by the parent company are then also apply to subsidiaries.

20/10/2012

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Translated via software

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Source:

Italian version of ReteArchitetti.it