CREDIT INSURANCE

1. CREDIT INSURANCE
An effective tool for risk mitigation/ credit
enhancement/ balance sheet protection

2. Presentation Overview
• Credit Insurance - Approach & Advantages.
• Why Credit Insure ?
• Basic forms of insurable Credit Risks :
• Commercial Risks
• Political Risks
• How does the Policy work ?
• Claims settlement Process & Services
• Key underwriting parameters for Indian companies.
• Credit Insurance : Advantages

3. Credit Insurance - Approach & Advantages
• Attained significance in the last 20 years globally.
• “Boutique underwriting business” which is done by very selective specialist insurance
underwriters globally.
• Solution based approach and NOT an off the shelf product.
• Very effective risk transfer mechanism for companies planning to go global
• Provides Credit Enhancement of client’s businesses.
• Supports growth strategies by contributing in strategic decision making for existing & new
business trade practices.
• Protects shareholder value for listed companies.

4. Why Credit Insure ?
Example
• Company X
• Turnover : Rs. 1,000
• Target Profit ( Margin 10%) : Rs. 100
• One unexptd. Bad debt : Rs. (100)
• Profit if NOT credit insured : Rs. 90
• Increase in turnover required to return to profit target INR 100.
• Profit if Credit Insured : Rs. 98 (80% loss indemnity)
( Claim = Loss x Indemnity )
• Increase in turnover required to return to profit target Rs. 20.

5. Basic Forms of Insurable Credit Risks
• Credit Insurance provides the mechanism to transfer the financial consequences presented by a
range of commercial & political credit risks.
• Commercial Credit Risk Insurance ( CCRI ) : Provides coverage
• in case of the Insolvency of the buyer.
• In case of Protracted Default of the buyer.
• Excludes risks of Non acceptance of goods and trade disputes.
• Political Risk Insurance ( PRI ) : Provides coverage for Non payment due to
• Govt. Moratorium
• Cancellation of Import License
• Occurrence of War
• Protracted Default of State Owned Companies
• Excludes risks of Devaluation or Currency fluctuation.

6. How does the CCRI Policy work ?
• “Approved Credit Limits” - Based on the detailed information the underwriters approve credit
limits on each buyer. This credit limit reflects the maximum outstanding balance that the insured
already has or expects to have in his books at any one point of time.
• “Discretionary Limit” is also provided by the underwriters, below which the insured is allowed to
offer credit facilities to clients without seeking prior approval of the underwriters.
• “Non Qualifying Loss” is the loss which does not qualify as a part of the claim. Usually these are
small losses of say INR 100 K – 150 K which are administratively very cumbersome for the
underwriters.
• Indemnity is provided up to 80% of the loss.
• Premium is calculated on the amount of insured turnover.

7. CCRI - Claims Settlement Process & Services
• Once any payment is due beyond the “due date” it is reported immediately to the
underwriters.
• Insured is allowed the flexibility of “ due date extension” without prior approval of the
underwriters within the maximum credit period specified in the policy. Only notification is
desired.
• The claim is settled immediately after the expiration of the defined “ Waiting Period” under
the policy. Usually waiting period is 180 days from the due date.
• Rights of recovery are subrogated to the underwriters who in turn take over the recovery
task. Any recoveries in excess of the indemnified amount are passed on to the insured up to
their share of the loss.
• Certain underwriters also provide the services of Bad Debt recovery from uninsured buyers
on a success fee basis.

8. CCRI - Key Underwriting Parameters
• Insurers provide “Whole Turnover” protection to clients.
• Coverage can be bought for diversified businesses individually or
collectively, provided the nature of business and trade practices are similar for
ex. All Services can be insured together.
• Indemnity is provided for 80% of the loss.

9. Policy Coverage in detail

10. Policy Covers…
All credit sales (Whole turnover excluding cash sales,
sales to government buyers, associates etc.), against:
o Non payment of trade receivables by your customers due to:
Insolvency of the buyer.
Protracted default of the buyer.

11.  The buyer/user is declared bankrupt
 He has made valid assignment, composition or other arrangement for the
benefit of his creditors
 A receiver has been appointed
 Order has been made for compulsory winding-up
 An effective resolution has been passed for voluntary winding-up
 An arrangement binding on all creditors has been sanctioned by Court or
“equivalent conditions”
Insolvency means…

12. Stop
Cover
t = 30
t = 0
Due
Date
t = 60
Claim
notified
t = 180
Claim
Settlement
Waiting Period
Protracted Default means…
Protracted default is said to occur when a debt remains unpaid for 6
months from the due date.
Extended
due date

13. What is not covered?
Exclusions
Default of insured,
agents/employees
Arrangements/compromises
without our approval
Dishonesty / Fraud
of Insured
Violation of credit
management procedures
Sales to subsidiaries
(Controlling interest)
Interest, taxes etc
Disputed debts
Claims in excess of
approved credit
limits
Government
bodies

14. Payments to
Insured
Pre-checks & U/W
Delivery & Invoice
Periodic Declarations
(Non)-payment on due date
NBI & premium Payment
Proposal for Cover
Recovery of the Debt
Payment of the
Indemnity
Action(s) taken to recover
Reminders sent to Buyer
Payment unrealized
Lodge a Claim
Placement process

15. Buyer-wise Credit limits
 These are dynamic, are fixed for the major buyers/users -
exposure over & above this pre-set limit is borne by the insured.
 Processing fee is payable for the credit limit appraisal
 Application form to be filled in buyer wise
Discretionary Credit Limits
 These are set for large number of small buyers subject to laid down
conditions like past trading experience, bankers' report etc
Credit Limits

16.  Prompt invoicing of sales
 Monthly statement of turnover
 Monthly declarations of overdue accounts
 Prompt notice/intimation of defaults
 All rights of insured debts to be preserved and exercised
 Documentary proof of non-payment
 Confirmation of debt for insolvency
Obligations of The Insured

17. Claim Process
 Claim to be lodged within 30 days of a debt becoming
overdue in prescribed format
 Documents to be enclosed:
- Copies of most recent unpaid invoices.
- Original bills of exchange.
- Relevant purchase orders, confirmations, delivery invoices, etc.
- All correspondence with the debtor relating to
the unpaid invoices.

18. Claim Process continued…
 A copy of notice of insolvency, or
 Documents showing collection action till date
 Assignment of debt form
 Letter of subrogation
Once claim is lodged, efforts made in consultation with Insured to recover debt.
Any recoveries made are paid to Insured.
The un-recovered amount is paid at the end of the “Waiting period” as claim

19.  Premium : the amount obtained by applying a rate percent on the annual
insured credit sales turnover
 Premium to be paid on estimated turnover, subject to adjustment on actual
turnover.
 The Premium rate as agreed at the inception of the policy, is valid for the
entire period of one year.
 Processing fee: Rs 1500/- to Rs. 2200/ - per buyer per year for Credit Limits
for domestic buyers
Costs

20. Credit Insurance - Advantages
• Will support Local/ global expansion plans across the globe in
diversified businesses.
• Can be one of the effective tool for checking the credit worthiness
and/or reputation of the prospective client(s).
• Provide “Sleep easy comfort”.
• Balance sheet protection .
• Maintains shareholder value in case of unexpected losses due to
macro economic issues and/or buyer specific scenario.
• Provides access to vast database of credit management specialists as a
part of an ongoing service.
• Specialized services of “ Bad Debt Collection” in case of any
eventuality.

21. NQL and Insured Percentage
Non Qualifying loss (NQL): If the claim amount is below NQL no claim will be
paid and if the claim amount crosses the NQL the entire claim amount subject to
the insured percentage will be paid.
Insured Percentage: The percentage of cover, which represents the maximum
percentage of the Loss payable under the policy.
The Maximum Liability for the Policy period ranges between 20 – 50 times the
premium paid

22. … The customers whom you feel are the most secured and the best, they may be the ones
who will WIPE you out :
• WORLD TRADE CENTER. NY
• ENRON
• K-MART
• SWISS AIR
• NATIONAL STEEL, ANDERSON…
Nothing is CERTAIN

23. THANK YOU