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Specification Compliance Insurance
Risk-Transfer is a new financial product, developed by Boyd International Consultants Inc., to transfer practically all of the financial risk in trade transactions from lenders to insurance companies. It consists of two elements - logistics audit and specification compliance - and is applicable to trade in all types of manufactured goods. Typically, trade transactions involve production of goods in one location, transit to another location and, quite often, resale to a third party. Financiers are exposed to risks at various points in this process and, consequently, require collateral to be posted by the borrowers to cover any potential loss. Risk-Transfer minimizes the need for collateral by pre-empting and/or insuring risk throughout the entire process.
Logistics audit starts by verifying that the parties to a transaction -manufacturer, freight forwarder, carrier, customs broker - are experienced and properly insured. The transaction is then monitored at each step from production to final delivery.
Specification compliance insurance is the unique element that covers the ultimate risk that goods may be found, after arrival, not to be as ordered. Without this coverage, goods in transit are of dubious value as collateral; with it, they can be treated as if they were guaranteed to be paid for, because the insurer will pay if the goods are not in accordance with specifications. This coverage is provided as an extension to a regular all-perils marine cargo policy; its main requirement is an inspection at the point of production by the insurer's designated auditor.
Risk-Transfer for Trade makes it possible for lenders to advance funds with little or no collateral other than a confirmed purchase order and the goods themselves. Whether a transaction is export, import or domestic, Risk-Transfer can be employed to enhance security and make financing available to many companies whose asset growth has not yet caught up with sales.
RISK-TRANSFER FOR TRADE
EXECUTIVE SUMMARY FOR FINANCIAL INSTITUTIONS
RISK-TRANSFER FOR TRADE IS A NEW INSURANCE PRODUCT THAT
ENABLES THE FINANCIAL INSTITUTION TO ELIMINATE ALL COLLATERAL RISK INVOLVED IN
FINANCING IMPORTS OR EXPORTS
IT CAN BE USED AS AN ENHANCEMENT OF CUSTOMERS' COLLATERAL
What it covers - Loss or damage to goods in transit
- Cancellation of order while goods are in transit
- Buyer's refusal to accept goods because of failure to meet purchase specifications
Effect of risk-transfer on market share - enables financial institution to expand services to existing customers
- stems erosion of market share by building customer loyalty
- enables financial institution to attract qualified new clients
- differentiates financial institution from competitors
- enhances financial institution's reputation, especially with small and medium-sized businesses
How risk-transfer works- The financial institution is covered by a special master policy that provides protection against all risks inherent in trade transactions
- The customer submits purchase order to the financial institution for approval of the final buyer's credit.
- Once the financial institution approves, the program administrator, Boyd International ("BIC"), takes over and handles details required to activate insurance
- Coverage takes effect from the time the Inspection Certificate is issued and the goods are handed over to the carrier. If goods are lost stolen or damaged in transit, BIC handles the claim process for the financial institution. The same procedure is followed if an order is cancelled in transit or if, upon arrival, the buyer finds that all or part of the shipment does not meet specifications and refuses payment. In all such cases, the insurance company pays the financial institution in full and takes the goods for salvage.
What risk-transfer costs- The current premium rate for a financial institution Master Policy is 70c per $ 100 of shipment value based either on landed cost or purchase order value (financial institution's option). For orders of $ 1,000,000 or more, rates are negotiable.
- The program administration fee is 0.5% of FOB value
Typically, the total package costs just over 1% for import transactions and roughly 1.5% for export transactions
What risk-transfer does for the financial institution- Transfers all credit risk from the financial institution's customer to the final buyer. When customer has a confirmed order from a creditworthy corporation, customer's credit is no longer relevant
- When goods are insured, financial institution has a receivable for full value either from the end buyer, if things go right, or from the insurance company if anything goes wrong
- For importers who supply large companies, the financial institution can fund Letters of Credit without risk
- For exporters whose customers are credit-insured, the financial institution can safely allow transactions to be done on open account
- Creates and maintains a high degree of customer loyalty to the financial institution by accommodating business growth with minimum capital. In effect, Risk-Transfer enhances the customer's balance sheet by converting high-quality purchase orders into assets.
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