Credit Insurance (eBook)

3.1.1 Short-, Medium-, and Long-Term Credits

In contrast to the term export finance, used in international trade for financing of larger transactions, exports of goods and services, especially capital or quasi-capital goods, equipment, and civil works that require crediting exceeding the term of 1 year due to their nature, for the financing of exports of consumer goods, spare parts, raw materials, and semifinished products, the expression trade finance is used in international trade, which usually designates short-term crediting (mostly credits and loans with a tenor of 90 or 180 days and up to 1 year, exceptionally even 2 years) or sales on deferred payment terms. The bulk of international trade consists of such exports. According to estimation, as much as 90 percent of the world’s trade is conducted on the basis of cash payment at delivery or on short-term credits.

Essentially, this book concentrates and deals with the latter, that is, short-term commercial credits or business-to-business (B2B) trade receivables, and not with medium- (mostly 1 and 2–5 years) and long-term credits from 5 to 10 years and more. It mostly deals with short-term credit insurance against commercial and other marketable risks, which may be ceded by the primary insurers to the global private reinsurance market.

3.1.2 Supplier and Buyer Credits

Supplier credits are commonly used for short-term crediting and are extended by suppliers (exporters) to their buyers (importers) while the refinancing may take place in the form of invoice discounting or by, for example, assignment of the proceeds arising from credit insurance policy rights. As illustrated in Figure 3.1, in this traditional and straightforward model, the seller contracts goods and/or services to the buyer and the credit terms are included in their commercial contract.

Buyer credits for the payments to suppliers are approved by the seller’s or exporter’s commercial bank to the buyers or their banks (on-lending to a client); sometimes this may be in the form of general purpose or project line of credit, either for export of variety of goods and/or services or for the needs of a particular large project. This main technique is usually used for medium- and long-term export credits. In addition to a commercial contract between the exporter and the importer, there is also a separate and parallel loan agreement concluded between their banks. The exporter is paid by its bank mainly on a cash basis by drawing of the loan after the commissioning or completion. The borrowing bank, backed by the agreement with the importer, then repays the loan to the lending bank, for example, in a preagreed loan period after the completion. Figure 3.2 illustrates the process and relations between the parties of the underlying commercial contract, banks involved in the transaction, and the credit insurer.

3.1.3 General Insurance Principles

Although credit insurance has some special characteristics, such as long-term and labor-intensive cooperation between the partners and more active day-to-day involvement of the insured in policy management, it is nevertheless founded on the same basic principles as other property insurances as:

Credit insurance is usually an optimal way of ensuring that a loss incurred from any individual payment default is covered by spreading the risk over large population of insured companies (insurance premium payers) where relatively small premiums cover large potential losses.

These economic pillars and specifics are also important for proper understanding of credit insurance legal specifics in comparison with other institutes of law on obligations. Conclusion and implementation of credit insurance contract as a contract of indemnity mostly follows similar general legal principles as in other obligations, as well as other trust-based contracts and other types of property insurance, such as:

If the credit insurance should be economically successful, the covered loss-causing events must be relatively independent. Supposing the past experiences are good bases for prediction of future results, the credit insurer must dispose of sufficient insurance capacities, know-how and risk management skills, as well as experience with this business field and track record.

3.1.4 Whole Turnover Insurance and Insurance of Individual (Specific) Transactions

ELIGIBLE TRANSACTIONS. The subject matter of credit insurance is the policyholder’s financial interest in granted short-term commercial credits. Short-term credits are usually given in domestic and international trade for raw materials, consumer durables, spare parts, and semifinished goods, while machinery, equipment, and other capital or quasi-capital goods as well as civil works require longer credit periods. Almost all business transactions are eligible for the insurance of supplier’s short-term credits—all legal trade with tradable goods and/or services. However, some business transactions may not be eligible for credit insurance due to different reasons arising from the traded goods and services (e.g., export of weapons and...