Credit Insurance All you need to know in 60 Minutes Andrew Petherbridge, Director, Trade Credit Insu

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Credit Insurance All you need to know in 60
MinutesAndrew Petherbridge, Director, Trade
Credit Insurance PracticeWillis Risk Services
(Ireland) LtdJune 2009

Disclaimer The Insurance Institute of Ireland
does not endorse or approve the content of any
third party.
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Objectives

• The aim of this module is to give you a basic
  knowledge of Credit Insurance and what it
  involves
• After today you should be able to
• Explain why there is a need for credit insurance
• Discuss the type of cover that is available
• Have a broader understanding of Credit
  insurance, its principles and policy wordings
• You wont be an expert!

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Quick test

• What risks does a credit insurance policy cover?
• Why would any company need it?
• Can you cover 100 of your debts?
• Can you cover debt in relation to disputed goods?
  
• Is VAT insurable?
• Does insurer offer carte blanche cover?
• What is a Discretionary Limit?
• What different policy structures are there?

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The Key Players

• Policyholders Sellers Debtors Ledger, Buyers,
  Credit Control Sales teams,
• Insurers Risk Assessment, Collections,
  Commercial
• Brokers - Specialist and Non-Specialist
• Government - regulation, intervention, political
  risk

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Types of sales

• Cash up front
• Cash on delivery
• Letter of Credit
• Open Credit - 30 days ?
• Which poses a risk for the seller ?

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Whats covered ...

• Insolvency
• Protracted Default
• Government Risk
• Political events
• War
• Insolvency and Default are most common!

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Whats not covered ...

• VAT other taxes
• Disputes
• Amounts exceeding credit limit
• Sales made after expiry of the Maximum
  Extension Period - MEP
• What else?

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When does cover begin?

• Despatch of Goods
• Submission of invoice re services
• Despatch parting with goods

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Different policy structures

• Credit Insurance is all about the selection of
  the right policy structure to fit the profile of
  the ledger and to match the business strategy,
  risk appetite and marginal value of the
  policyholder as that business evolves and reacts
  to economic conditions.
• Export /or Domestic Credit/Bad Debt Insurance
• Whole turnover
• Excess of Loss / Catastrophe
• Specific Account or Key Account Policy

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Different policy structures

• Insolvency, Protracted Default Political Risks
• Insolvency Only
• Political Risk Cover
• Sales Made v Claims Made
• Losses Arising/Losses Occurring

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Insurers Ground-Up, Whole turnover

• Euler Hermes part of Allianz plc
• Atradius, Dublin
• Coface, Dublin
• CIFS, London an underwriting agency part of Novae
  Group, Syndicates at Lloyds
• QBE, London
• 80-90 indemnity above NQL/Threshold

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InsurersCatastrophe/Excess of Loss

• Zurich, Frankfurt/UK
• ACE, London
• AIG, London
• Syndicates at Lloyds
• 95-100 indemnity over large deductible with NQL

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Client Expectations

• Immediate Response is a minimum expectation
• If Requested limit not achieved GET IT!
• If not achievable Client expects to know why
• We must ensure our Client understands how to use
  their policy (example using the Online System,
  proper use of their Discretionary Credit Limit,
  proper registration of overdue accounts)
• We must build close relationships with the actual
  Underwriters.
• Claims must be paid

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Credit Limits

• Approved Credit Limit as requested
• Crucial significance of active and pulled
  limits
• - 24/7 live and vulnerable
• Discretionary Credit Limit is a facility to
  reduce administration and afford flexibility
• Trading Experience matters but up to date
  Financial Management data is a prerequisite!

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Other terminology ...

• Maximum Extension Period (MEP) key moment
• Terms of Payment per Country Risk
• Maximum Credit Terms (MCT)
• Maximum Liability (IML)
• Aggregate First Loss (AFL)
• Non Qualifying Loss (NQL)
• Maximum Credit Limit (MCL)

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Other terminology ...

• Indemnity Minimum Retention (MR)
• Deductible - Each Every Loss
• Minimum Premium turnover sensitive, risk rate
  reflective
• Datum Line only debtors over agreed level and
  all limits vetted
• Threshold franchise
• Credit Limit Charges no commission, unit rate
  or lump fixed
• Pre-Credit Risk / Work-in-progress

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Claims Notification

• Immediate notification of event likely to cause
  loss
• OR
• After the expiry of MEP
• Seller can not agree to reschedule the debt !

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Claim Payment

• 30 days from liquidation Confirmation of Debt
  from the Insolvency Practitioner
• OR
• 6 Months from original due date of debt (default)

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Underwriting Data

• Please look at our Enquiry Form
• Product
• Industry/sector you sell to ..
• Terms of Payment
• Size of turnover geographic spread
• Bad debt history/quality of credit management
  resources procedures 1st line of defence
• Countries you sell to ...
• Top 10 customers ..
• Credit Insurance 2nd line of
  defence

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Policyholders all sectors

• Construction
• Motor
• Food/Agri
• ICT
• Manufacturing
• Retail
• Energy
• Media/Advertising
• Banking

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Reasons to buy Credit Insurance

• Balance sheet protection and comfort for
  shareholders
• Support growth, acquisition credit risk
  management strategies
• Transfer off balance sheet, reduce bad debt
  provisions, divert funds to RD or market
  penetration
• Access to Insurers vast and up to date database
• Facilitate financing arrangements
• Shared risk management Information with
  Insurers, a crucial second line of defence to
  your primary credit management
• Sarbanes-Oxley compliance mitigate associated
  costs
• FRS12

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The Market Right Now?

• Batten down the hatches No Cash-flow, 2009-10
  Survival Plan
• Credit Insurers Claims Volumes Peaking,
  Reinsurance pressures, Risk Control Measures
  taking effect
• Credit Limits a scarce resource gt micro
  management, culling
• Green Shoots? Lots of deadwood and toxic debt
• Lasting lessons but will they be learned?
• Regulation
• When is a sale not a sale?
• Credit should be a benefit frugally granted
• Cash-flow respect for credit control, rigorous
  application of credit procedures

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A parting thought

• Where theres a ledger
• theres a major company asset at risk
• it should be covered to protect the
• balance sheet and protect the shareholders.
• Global CFO I want to sleep easy with Credit
  Insurance

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Quick test

• What risks does a credit insurance policy cover?
• Why would any company need it?
• Can you cover 100 of your debts?
• Can you cover debt in relation to disputed goods?
  
• Is VAT insurable?
• Does insurer offer carte blanche cover?
• What is a Discretionary Limit?
• What different policy structures are there?

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Questions