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CREDIT INSURANCE

INTRODUCTION

Credit: A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date. When a consumer purchases something using a credit card, they are buying on credit (receiving the item at that time, and paying back the credit card company month by month). Any time when an individual finances something with a loan (such as an automobile or a house), they are using credit in that situation as well.

Credit Insurance: Credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy. This insurance product is a type of property & casualty insurance, and should not be confused with such products as credit life or credit disability insurance, which individuals obtain to protect against the risk of loss of income needed to pay debts. Trade Credit Insurance can include a component of political risk insurance which is offered by the same insurers to insure the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation etc. Trade credit is offered by vendors to their customers as an alternative to prepayment or cash on delivery terms, providing time for the customer to generate income from sales to pay for the product or service. This requires the vendor to assume non-payment risk. In a local or domestic situation as well as in an export transaction, the risk increases when laws, customs communications and customer's reputation are not fully understood. In addition to increased risk of non-payment, international trade presents the problem of the time between product shipment and its availability for sale. The account receivable is like a loan and represents capital invested, and often borrowed, by the vendor. But this is not a secure asset until it is paid. If the customer's debt is credit insured the large, risky asset becomes more secure, like an insured building. This asset may then be viewed as collateral by lending institutions and a loan based upon it used to defray the expenses of the transaction and to produce more products. Credit insurance is, therefore, a trade finance tool.
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Trade credit insurance is purchased by business entities to insure their accounts receivable from loss due to the insolvency of the debtors. The product is not available to individuals. The cost (premium) for this is usually charged monthly, and is calculated as a percentage of sales for that month or as a percentage of all outstanding receivables. Trade credit insurance usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid as a result of protracted default, insolvency or bankruptcy. Policy holders must apply a credit limit on each of their buyers for the sales to that buyer to be insured. The premium rate reflects the average credit risk of the insured portfolio of buyers. In addition, credit insurance can also cover single transactions or trade with only one buyer. Credit insurance was born at the end of nineteenth century, but it was mostly developed in Western Europe between the First and Second World Wars. Several companies were founded in many countries; some of them also managed the political risks of export on behalf of their state. Credit insurance indemnifies the policyholder against loss resulting from the nonreceipt of payment in respect of a transaction approved by the credit insurer. Such transaction must provide for the supply of goods or services on credit terms by the policyholder to a buyer. The non-receipt of payment must be due to the buyers insolvency/liquidation or protracted default or, where export transactions are involved can also be due to repudiation or political causes of loss38. A simple example: A yarn manufacturer supplies his product to a textile-mill on 120 days terms of credit. The credit insurer has insured the transaction. The textile-mill goes insolvent. In terms of the credit insurance policy the Protracted default means non-receipt of payment after a specified period from due date. Repudiation refers to the importers unlawful refusal to accept the goods/services supplied by the exporter. Political causes of loss consist of: a) the refusal of the importing country to allow the exported goods to enter unless such import prohibition already existed at date of export; b) the inability of the importer to transfer the purchase price to the exporter due to the importing countrys shortage of foreign currency or other regulation disallowing the transfer which came into force after shipment of the goods; c) non-receipt of payment due to strike, civil commotion, war or other similar disturbances.

Investopedia Definition: Credit insurance can be a financial lifesaver in the event of certain catastrophes. However, many credit insurance policies are overpriced relative to their benefits, as well as loaded with fine print that can make it hard to collect on. If you feel that credit insurance would bring you peace of mind, be sure to read the fine print as well as compare your quote against a standard aterm life insurance policy.

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HISTORY OF CREDIT INSURANCE

During the 1990s, a concentration of the trade credit insurance market took place and three groups now account for over 85% of the global credit insurance market. These main players focused on Western Europe, but rapidly expanded towards Eastern Europe, Asia and the Americas While trade credit insurance is often mostly known for protecting foreign or export accounts receivable, there has always been a large segment of the market that uses Trade Credit Insurance for domestic accounts receivable protection as well. Domestic trade credit insurance provides companies with the protection they need as their customer base consolidates creating larger receivables to fewer customers. This further creates a larger exposure and greater risk if a customer does not pay their accounts. The additions of new insurers in this area have increased the availability of domestic cover for companies. Many businesses found that their insurers withdrew trade credit insurance during the late-2000s financial crisis, foreseeing large losses if they continued to underwrite sales to failing businesses. This led to accusations that the insurers were deepening and prolonging the recession, as businesses could not afford the risk of making sales without the insurance, and therefore contracted in size or had to close. Insurers countered these criticisms by claiming that they were not the cause of the crisis, but were responding to economic reality and ringing the alarm bells. In 2009, the UK government set up a short-term 5 billion Trade Credit Top-up emergency fund. However, this was considered a failure, as the take-up was very low.

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FEATURES OF CREDIT INSURANCE

1. Captive Insurance: Select-Risk Cover: A multi-debtor structure that excludes lower-risk obligors from the insurance policy. Generally, prospective insureds can expect many underwriters to decline to quote on a select-risk portfolio or to receive higher premium rates or risk retention in cases where quotes are provided. However, insurers sometimes quote aggressively on select-risk portfolios if the remaining spread of risk is attractive. 2. Whole-turnover cover: A multi-debtor credit insurance structure that covers all of a companys open account sales. Many insurers will decline to quote select-risk portfolios over concerns with adverse selection. For whole-turnover export policies, most insurers are amenable to treating Canadian sales as domestic and therefore to excluding them at the insureds request. However, adding Canadian sales to an export program can help to make the portfolio more attractive to underwriters and improve the policys premium rate factor. Because whole-turnover programs maximize the spread of risk and generate higher premiums for insurers, clients may expect to receive more of the insurers capacity on higher risk credits than might otherwise be provided on a select risk portfolio. Key Account Cover: A multi-debtor structure that insures only the largest customers, e.g., customers with credit exposures above $500,000, the top ten customers, etc. 3. Catastrophic Cover: A multi-debtor structure with a sizeable deductible (either per-loss or first loss annual aggregate deductible) written into the policy. These structures would only result in indemnification in years where significant accounts receivable losses occur. Insured companies receive the benefit of significantly reduced premiums and approval of marginal credits because they retain high levels of risk. First-Loss (Ground-Up) Cover: A multi-debtor insurance structure traditionally offered by Coface, Atradius, and Euler Hermes. These insurers have substantial underwriter staffs and large databases of information on obligors around the world. As such, they have the ability to underwrite all or the majority of the customer credit limits needed by the insured. Because they have more control over

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which obligors are covered, these insurers may provide coverage with no (or low) deductibles. 4. Excess-of-Loss Cover: A multi-debtor insurance structure traditionally offered by FCIA, Ex-Im Bank, Chartis, Houston Casualty, QBE, Ace, and Lloyds of London syndicates. If comfortable with the prospective insureds credit management and credit procedures, these insurers will provide a high level of discretionary credit authority that allows the insured to underwrite the majority of the customers for coverage based on its own internal due diligence. Insurers typically reserve the right to underwrite the largest customer credit limits or those customers located in the most volatile markets. Larger annual aggregate deductibles are written to excess-of-loss policies to justify the significant discretionary credit authority granted. 5. Multi-Insurer Syndication: Insurers are increasingly willing to participating in syndicated credit insurance structures in cases where exceptionally large obligor exposures are to be covered. Most insurers require that their individual premiums be $100,000 or more to consider syndication. These structures have many benefits, including the diversification of insurer counter-party risk and the access to capacity necessary to establish large insured lines of credit for obligors. IRC has developed its own Alliance policy text for syndications that has now been accepted and utilized by all the insurers in the market. Syndications can be issued on both single and multi-debtor bases. 6. Global Programs: The traditional market view of a global credit insurance program is one in which a multinational company packages its global business and negotiates coverage with one carrier. Companies that take this approach hope to receive high-volume premium discounts and special treatment as a large premium account. However, individual business units often find that these globally tailored programs do not meet their local needs and that coverage can sometimes be improved in local markets. Further, concentrating coverage with one insurer at excessively low premiums can lead to coverage short-falls and other problems that multinationals should consider carefully. In response to the inadequacy of this traditional approach, IRC develops global programs with corporate management, in close coordination with individual business units, to place highly durable, locally and globally optimized credit insurance coverage. We typically rely on capacity from multiple insurers to achieve this goal on a global scale. While IRCs aim is to place coverage at reasonable premium levels, our foremost concern is maximizing coverage for our clients and building the
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foundation for strong and mutually beneficial relationships with insurers that will withstand market downturns and significant claims activity. 7. Captive Insurance: Captive insurance companies sometimes use trade credit insurers to reinsure the policies they issue to affiliated businesses. The credit insurer may issue coverage directly to the business unit, execute a reinsurance agreement with the captive, and then cede a portion of the risk and premium back to the captive. This structure is attractive if the credit insurer is licensed to write coverage in a state or country where the captive is not. Alternatively, the captive may issue coverage to the business unit and then buy credit insurance to cover the captives exposure above an attachment point. In both cases, the insurance can be structured in excess layers to help reduce premium costs and the captive can get the benefit of the credit insurers policy text and services, such as credit limit underwriting and claims processing. 8. Domestic Credit Insurance or Whole Turnover Domestic Credit Insurance: For sales within a business local market, domestic credit insurance covers against bad debt losses caused by insolvency and/or protracted default for a single buyer or entire portfolio of receivables (whole turnover). Policies are usually structured with a first loss of 500-1,000 and many underwriters are now offering fixed premiums inclusive of credit limit charges as well as an integral collections facility. 9. Export Credit Insurance or Whole Turnover Export Credit Insurance: For international sales, insurance covers various risks including insolvency, protracted default and political events in the foreign country. Coverage is available for a single overseas buyer or for an entire portfolio of foreign receivables (whole turnover). 10. Combined Domestic & Export Credit Insurance: For businesses trading in the home market as well as exporting abroad. The breadth of cover is similar to the Whole Turnover Domestic Credit Insurance Policy, but designed to cover a combination of domestic and export receivables. 11. Pre-Delivery Coverage : Cover designed for situations where goods are made to order. This type of policy protects against the insolvency of the buyer and/or political default or political frustration. May be offered as an independent policy or may be attached to a domestic or export credit insurance policy.
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12. Specific Account Credit Insurance is a policy designed to cover receivables for a single customer: Often the largest account the business has. Cover is often provided for insolvency only and an indemnity can be specified on the credit limit granted typically 80-90%. 13. Key Account Credit Insurance: This type of Credit Insurance policy offers businesses insolvency and protracted default protection, but only covers a selection of between 2 and 20 of their largest customers. Key Account policies will usually carry an excess. Catastrophe Credit Insurance is designed to protect companies with annual turnover in excess of 10 million and with established and effective credit control procedures in place. Under such policies, the insurer underwrites these credit control procedures and sets an Annual Aggregate Deductible, in excess of which, claims are payable. The deductible is usually set at a level of at least 25,000 and more commonly at 50,000-100,000. Global Credit Insurance is designed for multinational companies with trading centres in several countries. A single credit insurance policy is designed to costeffectively cover all the divisions or branches of the business on either a Whole Turnover or Catastrophe basis depending on the individual requirements. Such policies allow businesses to ease the burden of high-risk industry sectors or trading regions by incorporating cover with better established or safer regions.

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BENEFITS OF CREDIT INSURANCE

Credit insurance provides not only peace of mind to you, but also the following key benefits:

1) Catastrophic loss protection: Your receivables are one of your largest and most at-risk assets. Credit insurance protects against potential bad debt losses, thus providing a safety net. Click here to see an actual case study from our client portfolio.

2) Safe sales expansion; Credit insurance allows you to grow your business without worry. Whether you are trying to expand credit lines with existing customers, or extend competitive open credit terms to new accounts, using credit insurance to reduce or eliminate the risk is a great way to safely grow your business.

3) Increased Borrowing: Credit insurance can provide cost effective access to working capital that can help you grow and avoid cash flow crunches. Your credit insurance policy can help you maximize working capital availability from the receivables you pledge to your lender. Most ineligible receivables (including concentration of receivables with a few accounts and foreign receivables) can now be included in your borrowing base with your lender.

4) Credit Decision support and information on your customers: When you implement a credit insurance program with Global Commercial Credit, you are not just buying coverage on your receivables, you are getting a partner in credit risk management whose goal is to help you avoid credit losses before they happen and back you up when they do. Credit insurance can also provide you with valuable market intelligence on the financial viability of your customers (buyers), and, in the case of buyers in foreign countries, on any trading risks peculiar to those countries.

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5) Allows companies to lower their bad debt reserve; Credit insurance will allow you to lower your bad debt reserve significantly and manage write-offs with greater certainty. By reducing the bad debt reserve on this scale, you will be able to take excess bad debt reserves back into income (by provisioning significantly less) thus improving earnings, shareholder equity and financial ratios etc. Credit Insurance premiums are tax deductible (whereas your bad debt reserve is not).

6) Helps avoid an unexpected significant impact on your company: For example, you would have to generate a significant amount of future sales at $0 profit (beyond your normal sales) to make up for a credit loss.

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DETERMINING WHY TO BUY CREDIT RISK INSURANCE

Before actually going to the market for quotes, you would be best served by clearly identifying what your interest in credit insurance is and how you think it will benefit your company. As a custom tailored financial tool, there are many practical benefits to having this type of coverage in place. That said, there are also some common misconceptions about what this type of coverage can be used for. At the most basic level, credit risk insurance is designed to protect you from unexpected losses due to the insolvency or past due default on the part of your insured customers. The limited number of underwriters who specialize in this unique coverage will in most cases, conduct credit evaluations on the accounts you wish to insure and approve them for specific credit limits based on your requests and the results of their research. Given this active credit evaluation on the part of the insurer, credit insurance should not be approached as a tool you can use to grant credit to companies that don't merit it. Likewise, it should not be sought when you have an imminent loss that you are looking to shelter. Credit risk insurance is a proactive management tool that best helps you in the following specific areas:-

1. Catastrophic loss protection: Across most industries and companies of all sizes, it is generally true that the top 20% of accounts represent about 80% of the company's revenue. In some cases, the concentration of credit exposure among a few or even one key customer is even greater. Just one sudden, unexpected loss could have a devastating impact on the business. If you consider that your receivables are a concentration of all of your cost and your profit, and that, in many cases, you create them based on nothing more than a customer's promise to pay; you can see that there is a tremendous amount of risk facing your business. Even with customers you believe are "good as gold", the risk of unexpected default persists. Credit insurance is a great tool to remove this catastrophic risk from your balance sheet and cap your company's exposure.

2. Safe sales expansion: It is not uncommon for customers to request more credit than you are comfortable giving them, or to have new customers you aren't familiar with seek meaningful amounts of credit from you. While you may invest in a professional credit practice to review these requests and manage the exposures, if you are limiting sales as a result of concern over the risk, credit insurance is an ideal answer. Many companies use credit insurance to be able to expand on existing credit limits without having to put them at additional risk. It is also helpful in covering open credit sales to
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new accounts where you might have limited information and sales history. It is worth pointing out that using your credit insurance policy to support additional sales you would not have made otherwise will not only allow you to recapture the premium, it will help you drop additional profit to your bottom line.

3. Credit decision support: As mentioned earlier, in just about every case, the underwriters on your credit insurance policy are going to actively research, approve and monitor the accounts you wish to insure. Having an industry specific financial analyst doing this work for you as part of your credit risk insurance program adds a lot of expertise to your credit practice, or provides you, to a certain degree, with an outsourced credit department. This allows you to focus your internal resources more on cash flow management and collections work. If you consider the cost of amassing the information resources, many by costly subscription only, and hiring the additional expert financial analysts, this decision support alone is worth the typical annual premium. Most companies operate on the general rule that as long as the customer is paying timely credit management efforts can be focused elsewhere. Unfortunately, payment history is not a valid predictor of default. Many companies are current on their bills at the time they file for bankruptcy protection or are forced into default. Having the carrier watching your covered accounts and helping you evaluate credit limits on new risks is a great advantage to the program.

4. Borrowing enhancement: If the company borrows against its receivables, credit risk insurance can provide additional protection to the lender so they may be able to enhance the borrowing arrangements. They do this by increasing the percentage they will advance against insured accounts, and/or roping more accounts into the borrowing base- large concentrations, slow payers, export customers, etc. This allows you to maximize the amount of working capital available from the same pool of receivables. If you're in a high growth mode and find yourself in need of more working capital, credit insurance is a great way to resolve the problem.

5. Exporting on open credit: With more companies sourcing customers outside their own borders, the risk of granting credit terms has to be balanced against maintaining competitive terms against other sellers. Export credit risk insurance is one tool you can use to offer competitive open credit terms without the additional risk.

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6. Before you talk to a specialist in this field, you should take a look at your business: The customer base, credit practices, risk appetites, etc. and think about how you want the policy to go to work for you and where it can bring value. With this accomplished, you'll be better prepared to have a productive dialog with a specialist who can help you find the ideal solution.

7. Put option: A Put Option is an effective tool to help you continue to sell to a buyer(s) representing significant credit risk concerns or deal with a concentration issue with an investment grade customer. With the risk removed from your balance sheet, you are able to continue with the relationship until the credit risk improves or it no longer represents a concentration issue allowing you to realize your original revenue projections and / or increase market-share. It can also help you maximize borrowing availability under your existing bank line. This program involves a non-cancellable contract whereby the option seller agrees to buy qualifying accounts receivable at a pre-determined amount if your protected customer(s) goes Insolvent during the contract period. The protection would be provided by a financially strong counterparty.

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UNDERSTANDING CREDIT INSURANCE

Credit insurance is just that insurance. Like any form of insurance, credit insurance is there to protect the insured customers. And again, as with any insurance, there are limits to what can be insured. It would not be surprising if an auto insurer refused to insure an unlicensed driver, nor would we blink an eye if coverage was pulled on a previously licensed driver who lost his eyesight. The auto insurance company would simply be making prudent, common sense cover decisions based on the risk profile of the potential drivers. These decisions would help the customer avoid unacceptable risks. Even an increase in premiums would not change the fact that the very high risk of an accident occurring should these drivers get behind the wheel of a car makes these drivers are uninsurable. This is essentially what credit insurers do on a regular basis. Analyse the risk that a buyer will not pay for the purchases it makes on credit and guide its customers away from those buyers that are likely to fall into this high risk category. In the current economic climate however, they are finding it necessary to help their customers avoid unnecessary risks by reducing cover on potential buyers more often. There is an analogy with credit insurance. The economic landscape changes constantly and, during a downturn such as the current one, the changes are rapid and precipitous. Credit insurers therefore have to review their portfolio of risks, and withdraw cover on those buyers who have gone beyond the tipping point from insurable to uninsurable risk. In terms of total portfolio, the number of withdrawals of cover is very small a single figure percentage, and focused on an even smaller proportion of companies (that is to say, a number of withdrawn limits will apply to a single risk). At radius has maintained cover on the vast majority of risks, providing invaluable cover and a financial safety net in the current economic downturn. Just like the prudent motor insurer, credit insurers have a responsibility to guide their customers away from unacceptable risks and not simply cover every transaction, however perilous, as always, credit insurers are simply doing their job. There are numerous examples of credit insurers maintaining cover for their customers trade way beyond the early signs of a buyers impending demise. Credit insurers withdraw cover on buyers only as a last resort. Whats more, credit insurers are just that insurers and not finance houses. It isnt their role to shore up ailing or failing businesses: that may be the job of those businesses banks or investors, but not of a credit insurer whose customers have chosen to trade with those businesses. The credit insurer is there to protect its customers balance sheets by guiding the customer towards good risks and discouraging them from entering sales with
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buyers considered to be bad risks. When the credit insurer does insure a transaction that ends in default it reimburses its customer to the amount agreed upon in the terms of their insurance contract. And, if there is the risk of cover being withdrawn, buyers can help themselves by keeping their lines of communication with credit insurers open. While, in relatively benign economic times, credit insurers may be willing to make some assumptions about a buyers financial status, in the current climate it has become necessary to look more closely at a buyers books in order to assess the risk. A credit insurer is unlikely to insure a risk it cannot analyse. While it is no guarantee of credit insurance coverage, buyers can increase the likelihood of maintaining cover and favourable credit terms from their suppliers by opening their books to credit insurers. Some buyers may perceive a credit insurers request for up-to-date financial information as a hunt for reasons to pull cover. To the contrary it is a search for reasons not to withdraw cover.

Credit Insurance Underwriters: Credit insurance providers consist mainly of banks, private insurance companies and even capital funding companies. They offer credit insurance either as a main product or a component of other products and services. Today, the biggest credit insurance companies were formed through mergers, acquisitions or consolidations of smaller insurance firms or buying out the credit insurance segment of other companies who changed their business focus. Londons pre-eminence as a world finance and trade centre has resulted in the most sophisticated and competitive trade credit insurance market. All the underwriters listed below continue to be rated by agencies such as Moodys and Standard & Poors at an investment grade level and provide a the range of credit insurance policies outlined in this site to protect the seller against most of the risks that cause payments to fail. Market Structure: The three biggest credit insurance companies in the world today account for a hefty 85% of the total global insurance market. They are Atradius, Coface and Euler Hermes: o Euler Hermes is considered as the world's biggest credit insurer. It was formed when Allianz SE of Germany was acquired by Assurance Generales de France (AGF) in 2002. Euler Hermes has 53 subsidiaries around the world and maintains its headquarters in Rue de Richelieu in Paris.

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o Atradius is the second largest credit insurer and was formed when two leading international credit insurance providers NCM and Gerling Credit Insurance Group merged in 2001. The resulting company was renamed Atradius in 2004. Core products include credit insurance, export credit insurance and installment credit protection, among others. o The third biggest credit insurance underwriter, Compagnie Francaised' Assurance pour le Commerce Exterieur (COFACE), was originally an export credit agency founded in 1946 and eventually became the credit insurance arm of the banking group Natixis. COFACE offers export credit insurance and accounts receivables management and currently has presence in 93 countries. However, UK Credit Insurance Ltd work with all the major credit insurance providers as each have specialisms that may best match a business requirements. By assessing the product offerings of all our underwriters, we are able to recommend the best solution for clients needs. Most policies from our underwriters are written on a whole turnover basis covering all the debtors, however cover is available on a variety of different structures and we will be happy to guide you through the options. We have highlighted areas which we feel differentiate each of the listed underwriters, but we have not attempted to list all the classes of risk they will cover. Click on the underwriter name below to take you through to their specific page or contact us for a full appraisal of your requirements

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CREDIT INSURANCE REASONS FOR FAST GROWING CREDIT INSURANCE SECTOR

Credit Insurance is growing at a fast pace. There are various reasons for the boom of this sector, but the main reasons are the financial help provided by banks and various other financial agencies to exporters in their day to day business activities. The two main products which actually encourage trade credit insurance are a) Pre shipment credit and b) Post shipment credit. These are the financial help provided by banks and various other financial institutions so that the exports are at an ease. This helps the exporters to carry out their exporting function. To back these exports by a surety of return, many insurance company provide the traders with Credit Insurance.

a. Pre-Shipment Credit: Pre Shipment credit is issued by a financial institution when the seller wants the payment of the goods before shipment. 'Pre-shipment' means any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favour or in favour of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from India or any other evidence of an order for export from India having been placed on the exporter or some other person, unless lodgement of export orders or letter of credit with the bank has been waived. The main objectives behind pre-shipment credit or pre export finance are to enable exporter to: Procure raw materials. Carry out manufacturing process. Provide a secure warehouse for goods and raw materials. Process and pack the goods. Ship the goods to the buyers.
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Meet other financial cost of the business.

Types of Pre Shipment credit: Packing Credit Advance against cheques/draft etc. representing Advance Payments.

1) Packing Credit: This facility is provided to an exporter who satisfies the following criteria: A ten digit importer exporter code number allotted by DGFT. Exporter should not be in the caution list of RBI. If the goods to be exported are not under OGL (Open General License), the exporter should have the required license /quota permit to export the goods.

Packing credit facility can be provided to an exporter on production of the following evidences to the bank: Formal application for release the packing credit with undertaking to the effect that the exporter would be ship the goods within stipulated due date and submit the relevant shipping documents to the banks within prescribed time limit. Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the buyer. License issued by DGFT if the goods to be exported fall under the restricted or canalized category. If the item falls under quota system, proper quota allotment proof needs to be submitted.

The confirmed order received from the overseas buyer should reveal the information about the full name and address of the overseas buyer, description quantity and value of goods (FOB or CIF), destination port and the last date of payment.
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2) Advance against Cheque/Drafts received as advance payment: Where exporters receive direct payments from abroad by means of cheques/drafts etc. the bank may grant export credit at concessional rate to the exporters of goods track record, till the time of realization of the proceeds of the cheques or draft etc. The Banks however, must satisfy themselves that the proceeds are against an export order.

b. Post-Shipment Credit: Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters dont wait for the importer to deposit the funds. Types of Post Shipment Finance: The post shipment finance can be classified as: Export Bills purchased/discounted. Export Bills negotiated Advance against export bills sent on collection basis. Advance against export on consignment basis Advance against undrawn balance on exports Advance against claims of Duty Drawback.

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1) Export Bills Purchased/ Discounted. (DP & DA Bills): Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility. 2) Export Bills Negotiated (Bill under L/C): The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn security available in this method, banks often become ready to extend the finance against bills under LC. However, this arises two major risk factors for the banks: The risk of non-performance by the exporter, when he is unable to meet his terms and conditions. In this case, the issuing banks do not honor the letter of credit. The bank also faces the documentary risk where the issuing bank refuses to honour its commitment. So, it is important for the negotiating bank, and the lending bank to properly check all the necessary documents before submission.

3) Advance against Export Bills Sent on Collection Basis: Bills can only be sent on collection basis, if the bills drawn under LC have some discrepancies. Sometimes exporter requests the bill to be sent on the collection basis, anticipating the strengthening of foreign currency. Banks may allow advance against these collection bills to an exporter with a concessional rates of interest depending upon the transit period in case of DP Bills and transit period plus usance period in case of usance bill. The transit period is from the date of acceptance of the export documents at the banks branch for collection and not from the date of advance.

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4) Advance against Export on Consignments Basis: Bank may choose to finance when the goods are exported on consignment basis at the risk of the exporter for sale and eventual payment of sale proceeds to him by the consignee. However, in this case bank instructs the overseas bank to deliver the document only against trust receipt /undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports. In case of export through approved Indian owned warehouses abroad the times limit for realization is 15 months. 5) Advance against Undrawn Balance: It is a very common practice in export to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export, subject to a maximum of 10 percent of the export value. An undertaking is also obtained from the exporter that he will, within 6 months from due date of payment or the date of shipment of the goods, whichever is earlier surrender balance proceeds of the shipment. 6) Advance against Claims of Duty Drawback: Duty Drawback is a type of discount given to the exporter in his own country. This discount is given only, if the in-house cost of production is higher in relation to international price. This type of financial support helps the exporter to fight successfully in the international markets. In such a situation, banks grants advances to exporters at lower rate of interest for a maximum period of 90 days. These are granted only if other types of export finance are also extended to the exporter by the same bank. After the shipment, the exporters lodge their claims, supported by the relevant documents to the relevant government authorities. These claims are processed and eligible amount is disbursed after making sure that the bank is authorized to receive the claim amount directly from the concerned government authorities.

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REASONS TO HAVE CREDIT INSURANCE

Companies arrange Credit Insurance policies to protect themselves against the potentially disastrous effects of accounts. However, an insurance quote can also provide various additional benefits and besides bad debt insurance. Credit Insurance is important for many businesses, it might mean the difference between your online business surviving a bad-debt, as well as joining that long listing of names appearing in this Liquidator files. Credit Insurance (sometimes referred to as Trade Credit Insurance) provides a safety net so you know that a customer goes into insolvency you happen to be covered for any expenses outstanding. There are various types of policy available which can be tailored to your individual particular requirements. Whether you would like to Credit Insure your entire customer base or perhaps require Credit Insurance coverage to provide information and security on your own export debts, you're Credit rating Insurance adviser is friends and family placed to negotiate a Trade Credit Insurance policies that is best for you. Credit Insurance often lets you choose the companies you require to have cover regarding. Will probably be starting a particularly substantial project and be investing all his time, capital and risk into this, this means you will probably want to pay your business for how much risk you are shown to your Specialist Broker are appropriate with you in collating some details about previous bad debt history plus your customer profile. This is essential to enable us to get to know your business as understanding your company issues and asking far better questions will enable us to provide better answers from credit rating insurers.

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IMPORTANCE OF CREDIT INSURANCE IN NATIONAL AND INTERNATIONAL BUSINESS

The decisions made by a credit insurer influence the business of many parties. By granting cover, credit transactions are made possible. By declining or withdrawing credit insurance facilities, suppliers businesses are curtailed and buyers businesses may be forced into liquidation. The wrong decision by the credit insurer may lead to overtrading or loss of business with the concomitant negative effects on the micro and macro economy. Many export transactions would not take place without credit insurance. Credit insurance helps in channelling limited resources towards worthwhile and healthy enterprises; it promotes the earning of foreign exchange and thereby effects job creation. Internationally, credit insurance is often used for political purposes. By underwriting major capital goods/services projects, the economy of the importing country can be significantly influenced (e.g. Lesotho Highlands Water Scheme or the Mozal aluminium smelter project in Mozambique). The withholding of credit insurance facilities can be used to send a political message to the applying (importing) country. Through its international associations, 39 credit insurers have a considerable influence on international credit terms and conditions. Thus the credit insurers activities influence the national economy and can play an important role in international relations. The credit insurers indemnity has not infrequently saved policyholders businesses which would otherwise have been forced into insolvency.

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PRACTICING OF CREDIT INSURANCE

Credit insurance is usually underwritten by comparatively small mono-line insurance companies (as opposed to the large multi-line insurers) due to its specialized nature. Credit underwriting is not done actuarially but on an individual risk assessment basis. The International Credit Insurance and Surety Association and the Berne Union. This class of business is presently available in 72 countries40 with between one and three credit insurers per country. Most credit insurers writing domestic and short-term export business (see below for a description of the credit insurance products) are privately owned, some of the large European companies being listed. Government departments mainly conduct medium-/long-term capital goods/services export credit insurance or this business is supported via re-insurance facilities from government. The reasons for government involvement are: a) The long credit terms (up to and in excess of 10 years) for which it is often impossible to obtain re-insurance in the private market. b) Governments desire to promote exports, particularly of large projects and c) The political implications of such business.

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THE CREDIT INSURANCE PRODUCT

1. Domestic credit insurance: This type of insurance provides cover against a loss caused by the non-receipt of payment of amounts due and payable as a result of the sale of goods or services by a seller (the policyholder) in one country to a buyer (the risk) situated in the same country. The payment terms will usually not exceed 6 months and the insurance normally incepts immediately after delivery.42 Non-receipt of payment must be due to the buyers insolvency (or deemed insolvency) or protracted default. 2. Short-term export credit insurance: Exporters selling goods or services on short credit terms (not exceeding 12 months from date of shipment) can purchase export credit insurance, which provides for an 40 Credit insurers exist in almost all developed and developing countries. Underdeveloped countries economies usually do not lend themselves to writing this business on a profitable basis because demand for the service in such countries is generally non-existent or very low. Although other types of specialized policies and specifically designed covers are available from some credit insurers, this report will confine itself to ethical issues relating to the described products. Credit insurance usually incepts when the seller loses control over the goods not withstanding that the sales contract may incorporate a transfer of ownership clause, providing that ownership of the goods passes only to the buyer on receipt of payment by the seller. Indemnity of a bad debt loss emanating from the sale of goods or services by the exporter to an importer. Cover comes into effect as soon as the exporter loses control over the goods usually on loading of the goods on board a ship/aircraft or when the goods have been sealed into a container. In addition to covering losses resulting from the insolvency or protracted default of the importer, an export policy can also indemnify in cases of repudiation or political causes of loss. 3. Medium-/long-term contracts cover: Policies of this nature are specifically designed to credit insure a particular transaction involving the export of capital goods/services43 on medium (1 to 5 years) or long (5 to10 years) credit terms plus an additional pre-shipment/delivery period44 depending on the terms of the export contract. In addition to the causes of loss covered under a short term export credit insurance policy, these types of policies can also provide for indemnities against foreign exchange risks and certain other possible losses. Projects sold on such credit terms are usually very large and as it is impossible for an exporter to carry such a substantial credit on his books for the long period involved, credit insurance is vital because it allows the exporter to lay off or sell the
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credit risk and refinance himself. There are two methods that are internationally used for this purpose: a. Suppliers credit, which means that the exporter obtains promissory notes from the importer for the purchase price, which notes fall due in six monthly instalments over the agreed credit period (usually not longer than 5 years). The payment risk inherent in these promissory notes is credit insured and that enables the exporter to sell the notes (together with the credit insurance cover) to a bank on completion of the project and so receive cash for the export project on final delivery. b. Financial credit, which entails the importer entering into two contracts, the export contract with the exporter and a loan agreement with a financial institution. The importer will draw down the loan by instructing the financial institution to pay the exporter in cash against completion certificates.

Capital goods/services refer to such items as major machinery/equipment, construction or building contracts, technical installations, infrastructure projects etc. A pre-shipment/delivery period is the construction, manufacturing or building period before the project is handed over in whole or in part to the purchaser. Normally only be prepared to provide such loans provided the repayment risk is credit insured. Credit insurance is usually written on the basis of co-insurance. This means that the insurer does not cover 100% of a loss so that the policyholder always retains some interest in the risk, inducing him to handle credit giving with care even though he carries insurance. The uncovered portion of the debt can be anything between 5% and 50%

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TYPES OF CREDIT INSURANCE

There are mainly 4 types of credit insurance, which are briefly discussed in the following lines. 1. Credit life insurance: This insurance policy helps to pay the outstanding debt owed on your card at the time of your death. However, the company creditor needs to be the beneficiary of the policy. 2. Credit disability insurance: This particular credit insurance is helpful in protecting your credit ratings by making the minimum monthly payment that is due on your card. After you become disabled, the insurance company pays the minimum amount due on your card for some months. However, it doesnt cover any new purchases that you make after becoming disabled. 3. Credit involuntary unemployment insurance; It pays the minimum amount that is due on your account if you are downsized or laid off for a specific period. Usually, there is a set time period for making the payments. The insurance doesnt include any additional purchases after you become unemployed. 4. Credit property insurance: Usually this policy comes with your credit card or mortgage. It makes the payment for any purchased item, which gets destroyed or stolen. You can claim this insurance only if it satisfies the conditions for coverage that are listed by the insurance company.

How credit insurance benefits debtors: Credit insurance helps the debtor in many ways that are listed below: Covers the outstanding balance on your credit when you die Provides coverage on your minimum monthly payments if you become disabled Protects your credit rating by covering your dues Provides coverage on your minimum monthly payments if you lose your job Covers your purchased items that get destroyed in specific incidents
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CHALLENGES FACED BY INSURANCE INDUSTRY

Threat of New Entrants: The insurance industry has been budding with new entrants every other day. Therefore the companies should carve out niche areas such that the threat of new entrants might not be a hindrance. There is also a chance that the big players might squeeze the small new entrants. Power of Suppliers: Those who are supplying the capital are not that big a threat. For instance, if someone as a very talented insurance underwriter is presently working for a small insurance company, there exists a chance that any big player willing to enter the insurance industry might entice that person off. Power of Buyers: No individual is a big threat to the insurance industry and big corporate houses have a lot more negotiating capability with the insurance companies. Big corporate clients like airlines and pharmaceutical companies pay millions of dollars every year in premiums. Availability of Substitutes: There exist a lot of substitutes in the insurance industry. Majorly, the large insurance companies provide similar kinds of services be it auto, home, commercial, health or life insurance. The consumers as well as the investors should only focus on the insurer's financial strength and capability to meet on-going responsibilities to its policyholders. The fundamentals of the insurance company should be strong and should not indicate a poor investment opportunity as this might also deter growth.

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TRADE CREDIT INSURANCE

Credit insurance covers non-payment of enforceable domestic and foreign accounts receivable obligations. It may also cover pre-shipment credit exposure. Cover is available for sales made on open account, letter of credit, sight/time draft, and cash against documents terms. Repayment tenors of up to 180 days can be insured for the sale of non-capital goods and 5 to 7 years for the sale or lease of capital goods or for project finance. Companies use credit insurance to: Increase market share through the extension of open terms Facilitate accounts receivable or payable finance Facilitate direct bank financing to end-customers Mitigate risk and protect the balance sheet Obtain third-party feedback on obligor, industry, and country risks Increase leverage on obligors in default Increase confidence among investors, analysts, and banks

Financial institutions also buy credit insurance. These policies cover purchased or factored receivables or notes, letter of credit confirmations, and structured accounts payable or vendor finance facilities. Obligors are underwritten for insured credit limits either by the insurer or under the insureds discretionary credit authority. Some insurers write limits on a non-cancellable basis while others reserve the right to cancel or reduce coverage at any time. Because insurance is intended to cover unexpected loss, distressed obligors are usually excluded. Certain other risks are also excluded, notably disputed payment obligations and nuclear-related perils. Structurally, credit insurance requires the insured to retain some portion of the risk through co-insurance and/or deductible. Generally, higher risk retention yields lower premiums and increases the incentive for underwriters to cover marginal credits. Some insurers write single-debtor policies, but most insurers prefer to write portfolio (multi-debtor) coverage where the enhanced spread of risk can help the insured reduce premium and obtain protection on marginal credits. Other policy structure concepts include: Select-risk cover

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Whole-turnover cover Key Account Cover Catastrophic Cover First-Loss (Ground-Up) Cover Excess-of-Loss Cover Multi-Insurer Syndication Global Programs

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NEED FOR TRADE CREDIT INSURANCE

Payments for exports are open to risks even at the best of times. The risks have assumed large proportions today due to the far-reaching political and economic changes that are sweeping the world. An outbreak of war or civil war may block or delay payment for goods exported. A coup or an insurrection may also bring about the same result. Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import of certain goods or on transfer of payments for goods imported. In addition, the exporters have to face commercial risks of insolvency or protracted default of buyers. The commercial risks of a foreign buyer going bankrupt or losing his capacity to pay are aggravated due to the political and economic uncertainties. Export credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss. Credit Insurance / Trade Credit Insurance policies are required by Companies to guard themselves against the potentially disastrous effects of bad debts. However, a policy can also guarantee a range of additional benefits rather than just bad debt insurance. Credit Insurance / Trade Credit Insurance policies also offer you usage of unique, continually updated, financial information on both new and existing customers, meaning you are able to do business with Confidence. Credit Insurance / Trade Credit Insurance is imperative for lots of businesses, it could possibly mean the main difference between your company surviving a bad-debt, or joining that long list of names appearing within the Liquidators files. Credit Insurance (sometimes known as Trade Credit Insurance) provides a safety net to ensure you know any time a customer goes into insolvency you can be covered for any payments outstanding. It truly is impossible to predict whats going to happen towards your customers and you do not know what situation other businesses you trade with are typically in. Credit Insurance offers you protection for situations which are out of your hands but can have actually a massive influence onto your company. Tailored for your businesses needs There are many varieties of policy available that may be tailored to all your own particular requirements. Whether you intend to apply Credit Insurance / Trade Credit Insurance to your whole customer base or merely need a Credit Insurance policy / Trade Credit Insurance policy to produce information and security on your export debts, youre Credit Insurance adviser is ideally placed to negotiate a Credit Insurance / Trade Credit Insurance policy that meets your needs.

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Credit Insurance / Trade Credit Insurance often enable you to pick the companies that you want to obtain cover for. You could just be starting a really large project and be investing time, capital and risk with it, therefore you will probably want to cover your business for how much risk you have to face. If your company trades overseas or works with the export market you may make the most of Credit Insurance / Trade Credit Insurance that covers your specific situation. For example, you may need to secure Political Risk Insurance that will cover you when a government changes a law that features a negative affect what you can do to trade. It will cost you nothing, besides ten minutes of your time, to arrange a quote for Credit Insurance / Trade Credit Insurance through your own broker, although the response of so many Senior Directors / Business Owners is I do not possess 10 mins to spare, youll have considerably longer than that in case your business stopped trading because of a bad debt! Your Specialist Broker will work together with you in collating some details associated with previous bad debt background and your customer profile. This action is important allow us to begin to know your organisation as understanding your company issues and asking better questions will enable us to supply better

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ITS IMPORTANCE IN TODAYS BUSINESS WORLD

Companies arrange Credit Insurance policies to protect themselves contrary to the potentially disastrous effects of bad debts. Even so, a policy can also provide a selection of additional benefits and not merely bad debt insurance. Credit Insurance is truly essential for many businesses, it might mean the difference between your corporation surviving a bad-debt, or even joining that long report on names appearing in the Liquidators files. Credit history Insurance (sometimes generally known as Trade Credit Insurance) provides a safety net so you know whether a customer goes into insolvency you are covered for any payments outstanding. There are lots of types of policy available that can be tailored to your individual particular requirements. Whether you want to Credit Insure your entire customer base or to require a Credit Insurance cover to provide information and security on your own export debts, you're Credit history Insurance adviser is ideally placed to negotiate a Trade Credit Insurance cover that is meets your needs. Credit Insurance often allows you to choose the companies you require to have cover intended for. There's a chance you're starting a particularly great project and be investing major time, cash and risk into the item, therefore you will probably want for your business for as much risk you are exposed to Your Specialist Broker will continue to work with you in collating some details concerning previous bad debt history whilst your customer profile. Using this method is essential to enable us to get at know your business as understanding your business issues and asking superior questions will enable us to produce better answers from credit history insurers. There's no extra cost in your business by going via an expert broker as they are paid by the Insurance Company direct, and they also can often negotiate deals that you simply would not be in a position to obtain by going direct. Your Specialist broker can also be much more experienced in guiding you with the claims process before you submit them to make certain everything runs smoothly. So take your next step and arrange for your no-obligation quotation from the broker today - staying "too busy" won't save your business - do the item today! In our climate what survival guarantees does your small business have? John Beddows is often a Trade Credit Insurance Specialized with Rycroft Associates "Advising Businesses throughout the U. K"

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CREDIT INSURANCE IN INDIA

Credit insurance takes care of the risk of payment of the organizations and not of the individuals. To get insured, the holders of the policy should have a credit limit on each of the buyers. For Credit insurance, the rate of premium is kept low. It combines both Credit Life Insurance and Trade Credit Insurance. Credit insurance involves trade with a single buyer. The concept of this insurance was first incepted in the nineteenth century. During the time of first and second World Wars, the idea was conceived in the Western Europe. The various companies that were developed during this time offered credit insurance to the individuals. If the borrower of the loan dies or gets disabled then the insurance will pay the loan off. Trade Credit Insurance covers the risk of the payment during the time of delivery of services and goods. Private individuals are not provided with the facilities of this product. Premium is charged monthly against the issuance of the credit insurance. This insurance is a business driven by broker, who helps in the creation of market competition among the policy holders for better premium and policy wordings. Credit Insurance is the best way to manage credit risk in a cost effective way for any organization. It provides financial assistance during the time of any credit risks and overdue payments during domestic trade or exports. Before granting covers for the insurance various terms and conditions need to be fulfilled. Credit insurance is one of the important types of insurance that covers risk against the following: Trade Receivables Portfolio Business-to-Business Transactions Short Term Credit Risk

Credit insurance offers a number of benefits, which are available in the form of: Risk Mitigation Efficient collection of debts Complements credit management of the seller
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Enables development of new markets against protection provided Expert advice since buyers are analyzed for credit worthiness

The major Credit Insurance providers in India are ICICI Lombard and The New India Assurance. Highlights of the India Company scenario: 1. India has 52 billionaires in 2009 as the Forbes report. This is with all courtesy to the improvement in the India company situation. 2. India has been stated as the world's fastest growing wealth creator, all thanks to a vibrant stock market and higher earnings from the strata of Indian companies. 3. The number of top companies in India has outshone their performances in terms of net profit in just six months of the start of the fiscal year. This depicts a fast growth in corporate earnings. Insurance company: Is due to globalization, deregulation and also terrorist attacks; that the insurance industry is undergoing a massive change and the metamorphosis has been noteworthy in the last few decades. Clearing basics: Before we begin the analysis of Indian insurance industry, let us clear some basics on insurance. o In the words of a layman, insurance means managing risk. For instance, in life insurance segment, the insurance company tries to manage mortality (death) rates among the wide array of clients. o The insurance company works in a manner by collecting premiums from policy holders, investing the money (usually in low risk investments), and then reimbursing this same money once the person passes away or the policy matures. The greater the probability for a person to have a shorter life span than the average mark, the higher premium that person has to pay. The case is the same for all other types of insurance, including automobile, health and property.

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o Ownership of insurance companies is of two types: Shareholder ownership Policyholder ownership

o Types of Insurance: Life Insurance: Insurance guaranteeing a specific sum of money to a designated beneficiary upon the death of the insured, or to the insured if he or she lives beyond a certain age. Health Insurance: Insurance against expenses incurred through illness of the insured. Liability Insurance: This insures property such as automobiles, property and professional/business mishaps.

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EXPORT CREDIT GUARANTEE CORPORATIONOF INDIA LIMITED (ECGC)

Introduction: The Export Credit Guarantee Corporation of India Limited (ECGC) is a company wholly owned by the Government of India based in Mumbai, Maharashtra. It provides export credit insurance support to Indian exporters and is controlled by the Ministry of Commerce. Government of India had initially set up Export Risks Insurance Corporation (ERIC) in July 1957. It was transformed into Export Credit and Guarantee Corporation Limited (ECGC) in 1964 and to Export Credit Guarantee of India in 1983.

History: ECGC of India Ltd was established in July, 1957 to strengthen the export promotion by covering the risk of exporting on credit. It functions under the administrative control of the Ministry of Commerce & Industry, Department of Commerce, and Government of India. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, and insurance and exporting community. ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. The present paid-up capital of the company is Rs.900 crores and authorized capital Rs.1000 crores.

Workings of ECGC: Provides a range of credit risk insurance covers to exporters against loss in export of goods and services. Offers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them. Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan.

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Aids of ECGC in Credit Risk; a) Offers insurance protection to exporters against credit risks b) Provides guidance in export-related activities c) Makes available information on different countries with its own credit ratings d) Makes it easy to obtain export finance from banks/financial institutions e) Assists exporters in recovering bad debts f) Provides information on credit-worthiness of overseas buyers.

Its Need: Payments for exports are open to risks even at the best of times. The risks have assumed large proportions today due to the far-reaching political and economic changes that are sweeping the world. An outbreak of war or civil war may block or delay payment for goods exported. A coup or an insurrection may also bring about the same result. Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import of certain goods or on transfer of payments for goods imported. In addition, the exporters have to face commercial risks of insolvency or protracted default of buyers. The commercial risks of a foreign buyer going bankrupt or losing his capacity to pay are aggravated due to the political and economic uncertainties. Export credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss. Cooperation agreement with MIGA (Multilateral Investment Guarantee Agency) an arm of World Bank. MIGA provides: Political insurance for foreign investment in developing countries. Technical assistance to improve investment climate. Dispute mediation service.

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Notable Records: Largest Policy short term Rs.450 crores Largest database on buyers- 8 lakhs Largest credit limit- Rs.80 Crores Largest claim paid- Rs.120 crores Quickest claim paid- 2 days Highest compensation-Iraq Rs 788 Crores

On 31.3.2012 ECGC has achieved a magical milestone of Rs.1000 Crores of premium income......well deserved achievement by the efforts put in by all the officers of the Corporation. Thanks are due to the parent ministry officials, Export Customers and all Nationalised and other private Banks..... ECGC now offers various products for the exporters and bankers. If readymade products are NOT suited to an exporter/banker then ECGC designs tailor made products.

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ECGC Product: 1. SCR or Standard Policy: Shipments (Comprehensive Risks) Policy, commonly known as the Standard Policy, is the one ideally suited to cover risks in respect of goods exported on shortterm credit, i.e. credit not exceeding 180 days. This policy covers both commercial and political risks from the date of shipment. It is issued to exporters whose anticipated export turnover for the next 12 months is more than Rs.50 lacs. (The appropriate policy for exporters with an anticipated turnover of Rs.50 lacs or less is the Small Exporter's Policy, described separately). The risks covered under the Standard Policy: Under the Standard Policy, ECGC covers, from the date of shipment, the following risks: a. Commercial Risks: Insolvency of the buyer. Failure of the buyer to make the payment due within a specified period, normally four months from the due date. Buyer's failure to accept the goods, subject to certain conditions.

b. Political Risks: Imposition of restriction by the Government of the buyer's country or any Government action, which may block or delay the transfer of payment made by the buyer. War, civil war, revolution or civil disturbances in the buyer's country. New import restrictions or cancellation of a valid import license in the buyer's country. Interruption or diversion of voyage outside India resulting in payment of additional freight or insurance charges which cannot be recovered from the buyer. Any other cause of loss occurring outside India not normally insured by general insurers, and beyond the control of both the exporter and the buyer.

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2. Small Exporters Policy: The Small Exporter's Policy is basically the Standard Policy, incorporating certain improvements in terms of cover, in order to encourage small exporters to obtain and operate the policy. It is issued to exporters whose anticipated export turnover for the period of one year does not exceed Rs.50 lacs. In what respects is the Small Exporter's Policy different from the Standard Policy: Period of Policy: Small Exporter's Policy is issued for a period of 12 months, as against 24 months in the case of Standard Policy. Minimum premium: Premium payable will be determined on the basis of projected exports on an annual basis subject to a minimum premium of Rs. 2000/- for the policy period. No claim bonus in the premium rate is granted every year at the rate of 5% (as against once in two years for Standard Policy at the rate of 10%). Declaration of shipments: Shipments need to be declared quarterly (instead of monthly as in the case of Standard Policy). Declaration of overdue payments: Small exporters are required to submit monthly declarations of all payments remaining overdue by more than 60 days from the due date, as against 30 days in the case of exporters holding the Standard Policy. Percentage of cover: For shipments covered under the Small Exporter's Policy ECGC will pay claims to the extent of 95% where the loss is due to commercial risks and 100% if the loss is caused by any of the political risks (Under the Standard Policy, the extent of cover is 90% for both commercial and political risks). Waiting period for claims: The normal waiting period of 4 months under the Standard Policy has been halved in the case of claims arising under the Small Exporter's Policy.

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Change in terms of payment of extension in credit period: In order to enable small exporters to deal with their buyers in a flexible manner, the following facilities are allowed: o A small exporter may, without prior approval of ECGC convert a D/P bill into DA bill, provided that he has already obtained suitable credit limit on the buyer on D/A terms. o Where the value of this bill is not more than Rs.3 lacs, conversion of D/P bill into D/A bill is permitted even if credit limit on the buyer has been obtained on D/P terms only, but only one claim can be considered during the policy period on account of losses arising from such conversions. o A small exporter may, without the prior approval of ECGC extend the due date of payment of a D/A bill provided that a credit limit on the buyer on D/A terms is in force at the time of such extension. Resale of unaccepted goods: If, upon non-acceptance of goods by a buyer, the exporter sells the goods to an alternate buyer without obtaining prior approval of ECGC even when the loss exceeds 25% of the gross invoice value, ECGC may consider payment of claims upto an amount considered reasonable, provided that ECGC is satisfied that the exporter did his best under the circumstances to minimize the loss.

3. Specific Buyers Policy: Buyer-wise Policies - Short Term (BP-ST) provide cover to Indian exporters against commercial and political risks involved in export of goods on short-term credit to a particular buyer. All shipments to the buyer in respect of whom the policy is issued will have to be covered (with a provision to permit exclusion of shipments under LC). These policies can be availed of by: a. exporters who do not hold SCR Policy and b. By exporters having SCR Policy. In case all the shipments to the buyer in question have been permitted to be excluded from the purview of the SCR Policy.

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Different types of BP (ST): Buyer wise (commercial and political risks) Policy - short-term Buyer wise (political risks) Policy - short-term. Buyer wise (insolvency & default of L/C opening bank and political risks) Policy - short-term.

4. Service Policy: Where Indian companies conclude contracts with foreign principals for providing them with technical or professional services, payments due under the contracts are open to risks similar to those under supply contracts. In order to give a measure of protection to such exporters of services, ECGC has introduced the Services Policy. The different types of Services Policy and what protections do they offer: Specific Services Contract (Comprehensive Risks) Policy; Specific Services Contract (Political Risks) Policy; Whole-turnover Services (Comprehensive Risks) Policy; and Whole-turnover Services (Political Risks) Policy

Specific Services Policy, as its name indicates, is issued to cover a single specified contract. It is issued to provide cover for contracts, which are large in value and extend over a relatively long period. Whole-turnover services policies are appropriate for exporters who provide services to a set of principles on a repetitive basis and where the period of each contract is relatively short. Such policies are issued to cover all services contracts that may be concluded by the exporter over a period of 24 months ahead. The Corporation would expect that the terms of payment for the services are in line with customary practices in international trade in these lines. Contracts should normally provide for an adequate advance payment and the balance should be payable periodically based on the progress of work. The payments should be backed by satisfactory security in the form of Letters of Credit or bank guarantees. Services policies are designed to cover contracts under which only services are to be rendered. Contracts under which the value of services to be rendered forms only a small part of a contract involving supply of machinery or equipment will be covered under an appropriate specific policy for supply contracts.
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5. Buyer Exposure policy: Presently, in the policies offered to exporters premium is charged on the export turnover, though the Corporations exposure on each buyer is controlled through a system of approval of credit limits on the buyer for covering commercial risks. While this suits the small and medium exporters, many large exporters having large number of shipments have been complaining about the volume of returns to be filed under the policy necessitating the deployment of their resources for this purpose and also resulting in possible unintentional omissions or commissions in such reporting, which have an impact on the settlement of claims. There has been a demand for simplification of the procedures as well as for rationalization of the premium structure. Considering the requirements of such exporters, the Corporation has decided to introduce policies on which premium would be charged on the basis of the expected level of exposure. Two types of exposure policies one for covering the risks on a specified buyer and another for covering the risks on all buyers- are offered. Two types of Exposure policies are offered, viz, a. Exposure (Single Buyer) Policy for covering the risks on a specified buyer and b. Exposure (Multi Buyer) Policy for covering the risks on all buyers. 6. Export Turnover Policy: Turnover policy is a variation of the standard policy for the benefit of large exporters who contribute not less than Rs. 10 lacs per annum towards premium. Therefore all the exporters who will pay a premium of Rs. 10 lacs in a year are entitled to avail of it. In what respects is the turnover policy different from a standard policy: The turnover policy envisages projection of the export turnover of the exporter for a year and the initial determination of the premium payable on that basis, subject to adjustment at the end of the year based on actuals. The policy provides additional discount in premium with an added incentive for increasing the exports beyond the projected turnover and also offers simplified procedure for premium remittance and filing of shipment information. It also provides for higher discretionary credit limits on overseas buyers, based on the total premium paid by the exporter under the policy. The turnover policy is issued with a validity period of one year. In most of the other respects the provisions relating to standard policy will apply to turnover policy.

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7. Construction Works Policy: Construction Works Policy is designed to provide cover to an Indian contractor who executes a civil construction job abroad. The distinguishing features of a construction contract are thata. the contractor keeps raising bills periodically throughout the contract period for the value of work done between one billing period and another; b. to be eligible for payment, the bills have to be certified by a consultant or supervisor engaged by the employer for the purpose and c. that, unlike bills of exchange raised by suppliers of goods, The bills raised by the contractor do not represent conclusive evidence of debt but are subject to payment in terms of the contract which may provide, among other things, for penalties or adjustments on various counts. The scope for disputes is very large. Besides, the contract value itself may only be an estimate of the work to be done, since the contract may provide for cost escalation, variation contracts, additional contracts, etc. It is, therefore, important that the contractor ensures that the contract is well drafted to provide clarity of the obligations of the two parties and for resolution of disputes that may arise in the course of execution of the contract. Contractors are well advised to use the Standard Conditions of Contract (International) prepared by the Federation International Des Ingenieurs Conseils (FIDIC) jointly with the Federation International du Batiment et des Travaux Publics (FIBTP). Risks covered by Construction Works Policy: The Construction Works Policy of ECGC is designed to protect the Contractor from 85% of the losses that may be sustained by him due to the following risks: a. Insolvency of the employer (when he is a non-Government entity); b. Failure of the employer to pay the amounts that become payable to the contractor in terms of the contract, including any amount payable under an arbitration award; c. Restrictions on transfer of payments from the employer's country to India after the employer has made the payments in local currency; d. Failure of the contractor to receive any sum due and payable under the contract by reason of war, civil war, rebellion, etc;

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e. The failure of the contractor to receive any sum that is payable to him on termination or frustration of the contract if such failure is due to its having become impossible to ascertain the amount or its due date because of war, civil war, rebellion etc; f. Imposition of restrictions on import of goods or materials (not being the contractor's plant or equipment) or cancellation of authority to import such goods or cancellation of export license in India, for reasons beyond his control; and g. Interruption or diversion of voyage outside India, resulting in his incurring in respect of goods or materials exported from India, of additional handling, transport or insurance charges, which cannot be recovered from the employer. 8. Overseas Investment Guarantee: ECGC has evolved a scheme to provide protection for Indian Investments abroad. Any investment made by way of equity capital or untied loan for the purpose of setting up or expansion of overseas projects will be eligible for cover under investment insurance. The investment may be either in cash or in the form of export of Indian capital goods and services. The cover would be available for the original investment together with annual dividends or interest receivable. The risks of war, expropriation and restriction on remittances are covered under the scheme. As the investor would be having a hand in the management of the joint venture, no cover for commercial risks would be provided under the scheme. The main features of the Overseas Investment Insurance: For investment in any country to qualify for investment insurance, there should preferably be a bilateral agreement protecting investment of one country in the other. ECGC may consider providing cover in the absence of any such agreement provided it is satisfied that the general laws of the country afford adequate protection to the Indian investments. The period of insurance cover will not normally exceed 15 years in case of projects involving long construction period. The cover can be extended for a period of 15 years from the date of completion of the project subject to a maximum of 20 years from the date of commencement of investment. Amount insured shall be reduced progressively in the last five years of the insurance period.

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9. Small and medium export policy: ECGC introduced a Policy exclusively for the SME sector units in 4th July, 2008. The Policy is particularly provides the SME Sector easy administrative and operational convenience. The features of the SME Policy are as under: Features of Small and Medium Exporters Policy at a glance No. Particulars Details: a. Policy period 12 months b. Processing Fees Rs.1000 c. Credit limit fees No d. Discretionary Limit No e. Declarations No f. Premium Rs.5000 g. Maximum Loss Limit Rs.10 lacs

h. Single Loss Limit Rs. 3 lacs i. Report of overdue 60 days from the due date j. Waiting period Two months from the due date or extended due date k. Percentage of cover 90% This Policy is meant for exporters engaged in manufacturing activities having invested in plant and machinery or engaged in export of services having invested in equipment as per MSMED Act, 2006. This Policy can be issued to an exporter qualifying as per the MSMED Act, 2006. The exporter desirous of obtaining the Policy should furnish the certificate issued by the designated authority. (District Industries Centres)

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INTERNATIONAL CREDIT INSURANCE & SURETY ASSOCIATION

The International Credit Insurance & Surety Association (ICISA) was founded in April 1928, forming the first trade credit insurance association.]The Association is registered in Zurich (Switzerland) under Swiss Civil Code (article 60). The Secretariat is based in Amsterdam. ICISA was established as (ICIA) (International Credit Insurance Association) in 1928. As the first association for the industry, it has evolved and grown and the current members account for 95% of the world's private credit insurance business, insuring risks in practically every country in the world. The International Credit Insurance & Surety Association (ICISA) is the leading global association representing trade credit insurers and surety companies. ICISA members form a central role in facilitating trade, by insuring payment risks resulting from local sales as well as exports, or by providing security for the performance of a contract. Members of ICISA meet regularly and benefit from an open exchange of information and expertise. ICISA promotes sustained technical excellence, industry innovation and product integrity. ICISA has a proactive role as advocacy and media relations organisation on issues and topics that are relevant for the members. Furthermore ICISA advises international and multinational authorities on vital issues related to the trade credit insurance and surety bond industries. The object of the Association is to study questions relating to Credit Insurance and Surety, to provide opportunities for Members' employees to acquire knowledge of the theory and practice of credit insurance and surety underwriting, to represent the Members interests and to initiate means whereby the common action of the Members can be facilitated in order to develop their mutual relations in the interest of their national and the international economy, in the interest of their insured and in their own interest."

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Main Line of Business: 1. Trade Credit Insurance: Trade Credit Insurance insures against the risk of non-payment by a buyer. Trade credit insurance policies can include a wide range of cover, depending on the circumstances. If a buyer does not pay, the trade credit insurance policy will pay out a percentage of the outstanding debt. This percentage usually ranges from 75% to 95% of the invoice amount, but may be higher or lower depending on the type of cover that was purchased. 2. Surety & Bonds: Surety bonds guarantee the performance of a variety of obligations, from construction or service contracts, to licensing, to commercial undertakings. The Surety guarantees to pay the direct loss suffered by one party (generally known as Employer/Beneficiary) as a result of a contractual default by the other party (generally known as the Contractor). For example, the failure of a contractor to complete a contract in accordance with its terms and specifications or the failure of an enterprise to pay taxes or customs duties to a government or department. 3. Reinsurance: A reinsurance company insures the risk that has been underwritten by an insurance company. The risk of a major loss event imposes a burden that no single company can bear. Reinsurance makes it possible for these risks to be underwritten. In a way, one could say, "reinsurance is insurance for insurance companies". Over the years the international reinsurance sector has developed into a highly specialised financial services industry that works closely in conjunction with direct insurers to meet the needs of their customers. ICISA's Reinsurance Members have specialised departments focusing solely on the reinsurance of credit insurance and surety risks.

Members' main lines of surety business are: Customs, tax and/or similar bonds Bonds concerning concessions and licenses Judicial Bonds Bonds concerning purchases of goods and/or services\ Bonds concerning leases Bonds concerning construction and/or supply contracts Financial bonds

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CASE STUDY

Client: Computer Products Wholesaler Topic: Decision Support Scenario Situation: Middle Market Company selling into a changing industry - specifically, how they do business. Historically, sales were conducted on C.O.D. basis, or very short terms; however, accounts have begun to demand open credit terms and our prospect has little experience managing credit risk. Also, the number of new accounts seeking credit had been growing to unmanageable levels. Operating Facts: Annual Sales: $14 million, Average Accounts Receivable: $2 million, Gross Margin: 25%, Account Turns Per Year: 7, Credit Function Handled by the Management Team.

Objective: Outsource credit analysis function to provide expert advice, allowing our prospect the ability to safely grow their business. Solution: Implemented a credit insurance program that provided credit risk assessment on their medium and large accounts. The policy assumes the responsibility of continuous monitoring on all covered accounts - no credit "due diligence" required by our client. The policy was customized to provide immediate credit decisions for new medium sized accounts. Also, marketing prospect lists were developed with names of accounts pre-approved under the policy. Results: The program produced immediate results. Sales were made to new and existing accounts on open credit terms that our client would have never entertained prior to the adoption of the credit insurance program. Our client successfully grew their business by 200% during the initial policy period and is projecting to generate approximately $35 million in revenue over the next year.
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Decision Support/Profit Pay-out Full Time Credit Expert Credit Insurance Premium Overhead Savings Additionally One Time Sale Potential Gross Profit Knowledge of Potential Account
Cost To Insure This One Transaction

$35,000 $21,000 $14,000

$8,00,000 Opportunity $1,20,000 (bid-lower margin)


NONE

$8,000

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CONCLUSION

Trade credit insurance usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid as a result of protracted default, insolvency or bankruptcy.

Credit insurance can provide cost effective access to working capital that can help you grow and avoid cash flow crunches

Analyse the risk that a buyer will not pay for the purchases it makes on credit and guide its customers away from those buyers that are likely to fall into this high risk category.

Credit Insurance / Trade Credit Insurance policies are required by Companies to guard themselves against the potentially disastrous effects of bad debts. However, a policy can also guarantee a range of additional benefits rather than just bad debt insurance.

From 1990, the year Credit Insurance was established; it has been progressing at a very high speed. As many companies running its day to day activities in credit, they have come to know the importance of credit insurance.

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