| Q: | What is Credit Insurance? |
| A: | Credit insurance provides your business with protection against the failure of your customer to pay their trade debts. This can arise because your customer becomes insolvent or because your customer fails to pay within a set time. These risks are "commercial" risks. Companies and commercial banks with foreign exposures can also protect themselves against a range of "political" risks which may also prevent or delay payment. These arise when payment is not received as a direct result of the occurrence of war or civil war in the buyers country, cancellation of the contract by the government of the buyers country or when regulations which either prevent the export or import of the products or prevent or restrict the transfer of hard currency from the buyers country are introduced by the government.
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| Q: | Why should I consider using Credit Insurance? |
| A: | Credit Insurance protects the riskiest portion of a company's current assets portfolio: Accounts receivable. On average companies have over 40% of their current assets in the form of trade debtors. For companies engaged in foreign trade, the risk of not getting paid is compounded by factors beyond their foreign debtors' control. Actions of their debtors' foreign governments that put assets at risk and pose immeasurable threats to business of every size, in every industry, everywhere. The cost of bad debt can be very significant. For example if a company is operating on a 10% profit margin, a $500,000 bad debt would require $5 million of additional sales to make up for the loss incurred. Even when companies are not concerned with incurring bad debt, they may find themselves at a competitive disadvantage by reducing their credit limits, not taking advantage of opportunities to penetrate new markets or win new business. Credit Insurance can be very effective as a strategic marketing tool which often makes the difference between winning or losing a sale.
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| Q: | How much does credit insurance cost? |
| A: | The cost of a well-diversified portfolio is normally a fraction of 1 % of insured sales. These costs are easily recovered through incremental gross profit, reduced borrowing costs, and the ability to cover losses incurred as a result of insolvencies, protracted defaults, or political risk.
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| Q: | When is premium paid? |
| A: | Normally, a Minimum & Deposit Premium (“M&D”) representing approximately 80% of the anticipated annual premium is payable upfront and earned at the Policy’s inception. Each quarter, the Policyholder files a report of sales made during the previous quarter and the premium due on these quarterly sales are deducted from the M&D already paid. At the end of the 12-month Policy period, reconciliation is made to determine the final premium due.
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| Q: | How are my buyers insured? |
| A: | There are two ways you can extend credit to your buyers: 1) Discretionary Credit Limit (“DCL”) and 2) Special Buyer Credit Limit (“SBCL”). A Discretionary Limit on the Policy allows a Policyholder the discretion to make their credit decisions internally up to the amount of the Discretionary Limit granted by the insurer. Exposures in excess of the Discretionary Limit are submitted to Underwriters for their review. The Insurer individually endorses each one of these buyers specifically on the Policy, identifying the company by name, and assigning a dollar value to the coverage. Normally, this dollar amount of coverage coincides with the peak receivable position during the Policy year.
A team of specialty Underwriters analyzes each buyer approved for coverage on a Policy. Underwriters use a variety of credit information sources to complement the investigations of your credit department in order to provide you with the coverage you require.
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| Q: | Can I insure a single buyer transaction? |
| A: | Yes. Premium rates to insure single transactions are understandably higher than those to insure a pool of receivables because of the absence of a spread of risk. In addition, some Underwriters will not write one off transactions at all, which limits the options available to obtain the most cost-effective rates.
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| Q: | In the past, my credit losses have been minimal. Why should I insure my receivables? |
| A: | Predicting the future just by extrapolating from past or current trends can be risky business! Although accounts receivable represent, on average, over 40 percent of a company’s assets portfolio, it is the only asset that is often left unprotected. Credit Insurance can protect you against severe credit losses, which result in reduced working capital and an erosion of profits. Just as you insure your property, your inventory and your employees, it is prudent to insure all of your assets against severe loss.
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| Q: | I don’t want to insure all my customers. Can I just insure a select few? |
| A: | Yes, as long as Underwriters determine that you are not adversely selecting against them and that your selected customers are creditworthy. Some companies opt to insure customers with exposures above a certain level or, what they consider their key customers. Some exporters may want to insure their customers only in certain countries or areas of the world. There are many ways to structure coverage and accommodate the way you wish to conduct your business.
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| Q: | Why should I use a broker? Is it not better to deal directly with the insurers? Is there a difference in the cost? |
| A: | As an independent broker specializing in trade credit and political risk, Structured Trade Services has access to all insurers that cover those risks. That access translates into one of the most significant benefits to the client: unleashing the competitive process in the market by getting insurers to compete for the client’s business. When insurers compete, the client wins. A few insurers sell through their own sales personnel; obviously this is not in the client’s best interest as it limits it to that insurer’s products and reduces competition.
In addition to identifying the insurance and financial services that are right for your business, our commitment to quality service enable us to offer our clients competitive pricing, a broad choice of products and unparalleled advocacy. This commitment means we:
- Help solve problems related to your coverage
- Monitor credit line expiration dates and adherence to approved credit limits
- Prepare and submit buyer credit applications to Underwriters for review
- Explain the coverages and options available to you during the Policy period and re examine your coverage at renewal time
- If required, work with your lender and other interested parties and assist them in understanding what the Policy does and how it works
- Guide you through the claims process for a prompt and fair resolution of your claim
The insurance company pays a commission to the broker on risks placed. The client pays the same premium whether or not a broker is involved.
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| Q: | What is “Political Risk”? What does it cover and why do I need it? |
| A: | Unfortunately, there are many more political uncertainties in the world today than was the case a few years ago. Political risk insurance protects against adverse effects on the contracts, enterprises or investments of companies doing business with or within foreign countries resulting from arbitrary, discriminatory or capricious acts of the governments or public authorities of such foreign countries. Political risks can also result from actions of one’s own government (i.e. embargoes and export license cancellation or restrictions).
Political risk insurance should be considered as protection against losses on foreign equity investments or other assets in a foreign country. Additionally, political risk insurance should be considered as a means of protection against loss of cash flow from a foreign project or contract.
Export credit insurance is a form of political risk insurance. It protects manufacturers and exporters against commercial and political losses where credit is extended to foreign buyers.
In addition to export credit coverage, Political Risk Coverages encompasses the following categories:
- Insurance of Overseas Investments: Confiscation, Expropriation and Nationalization; Currency Inconvertibility; and War, Revolution, Insurrection
- Insurance of Overseas Contracts (Government Buyers): Contract Frustration including Contract Repudiation/Termination; Default/Nonpayment; Export-Import Cancellation, Restriction, Suspension; Currency Inconvertibility/Exchange Transfer; War, Revolution, Insurrection (Force Majeure); Arbitration Award Refusal; and Unfair/Wrongful Calling of On-Demand Bonds or Standby Letters of Credit
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