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Credit Risk Insurance Credit Risk Insurance OverviewOverview
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CREDIT RISK INSURANCECREDIT RISK INSURANCE
What It Is and What It Is and Is NotIs Not How Does It HelpHow Does It Help Underwriting Philosophies Underwriting Philosophies Policy TypesPolicy Types Avoid Documentary Pitfalls Associated Avoid Documentary Pitfalls Associated
with Claim Perfectionwith Claim Perfection Benefits to Exporter and Foreign BuyerBenefits to Exporter and Foreign Buyer
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GlobalizationGlobalization
More Aggressive Sales StrategyMore Aggressive Sales Strategy Higher Risk Emerging MarketsHigher Risk Emerging Markets Financing – Key Purchasing Financing – Key Purchasing
ConsiderationConsideration Increased Credit ExposuresIncreased Credit Exposures
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What is Credit Risk What is Credit Risk Insurance?Insurance?
Protection of A/R from Protection of A/R from 2 Default Triggers: 2 Default Triggers:
Commercial DefaultCommercial Default Insolvency; Devaluation Insolvency; Devaluation or, Protracted Defaultor, Protracted Default
Political DefaultPolitical Default Transfer Risk; Transfer Risk; Arbitrary Government Arbitrary Government Action; Civil UnrestAction; Civil Unrest
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What It Is NotWhat It Is Not
A Tool to Make a A Tool to Make a Bad Credit Good Bad Credit Good ((It renders It renders a good credit a good credit acceptable in a acceptable in a high risk market)high risk market)
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How Does Credit Risk How Does Credit Risk Insurance Help? Insurance Help?
Enhance Enhance CompetitivenessCompetitiveness
EnhanceEnhance Financing OptionsFinancing Options
EnhanceEnhance Protection Against Protection Against Payment DefaultPayment Default
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CREDIT RISK INSURANCE CREDIT RISK INSURANCE
PurposePurpose: : Expand sales, Improve financial Expand sales, Improve financial options and mitigate payment risk options and mitigate payment risk
Exploit Payment Risk to Competitive Exploit Payment Risk to Competitive AdvantageAdvantage
Covers: Covers: Commercial and /or Political RisksCommercial and /or Political Risks Does Not CoverDoes Not Cover: : Product disputes or Product disputes or
contract cancellationcontract cancellation Conditional: Conditional: Claim payment will be made Claim payment will be made
only if insured can demonstrate conformity to only if insured can demonstrate conformity to the policy’s terms and conditions the policy’s terms and conditions
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Who Uses Credit InsuranceWho Uses Credit Insurance
Western Europe – Western Europe – 83% of World Market 83% of World Market (Germany/26%, (Germany/26%, France/18%, France/18%, U.K./13%)U.K./13%)
Rest of World – 17% Rest of World – 17% of which North of which North America uses only America uses only 6%6%
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U.S. Firms Typically U.S. Firms Typically InsureInsure
Finished GoodsFinished Goods Work in ProgressWork in Progress Buildings/Buildings/
EquipmentEquipment PeoplePeople
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Accounts Receivable Accounts Receivable Portfolio Portfolio
A/R is your 2A/R is your 2ndnd most fluid asset most fluid asset after cash after cash
Timed Payment Timed Payment Obligations Obligations
Yet, > 94% of Yet, > 94% of open account open account sales in US are sales in US are uninsured uninsured
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POLICY TYPESPOLICY TYPES
Short-termShort-term Multi-Buyer Multi-Buyer (or Single(or Single Buyer)Buyer)
Medium-term Medium-term Single Buyer Single Buyer
LeasingLeasing (Operating or (Operating or Financing)Financing)
Bank L/CBank L/C
Credit Risk Ins.
Credit Risk Ins.
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STANDARD MULTI-BUYER STANDARD MULTI-BUYER POLICYPOLICY
MultipleMultiple Sales, Buyers, CountriesSales, Buyers, Countries Short-term:Short-term: 30 – 360 Days / 12-month period 30 – 360 Days / 12-month period Annual DeductibleAnnual Deductible Spread of RiskSpread of Risk (all open account sales) (all open account sales) Premium Based on Risk/Exporter ExperiencePremium Based on Risk/Exporter Experience Ledger & Credit DCLs AvailableLedger & Credit DCLs Available Coverage: 90% to 100% Coverage: 90% to 100% Assignable Assignable
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Short Term Single BuyerShort Term Single Buyer
Short-Term (30 - 360 Days)Short-Term (30 - 360 Days) 12 Month Policy Period12 Month Policy Period One or More ShipmentsOne or More Shipments Premium Rate Schedule (Exim)Premium Rate Schedule (Exim) Negotiated Premiums (Private Sector)Negotiated Premiums (Private Sector) Minimum Advance Premium PaymentsMinimum Advance Premium Payments No Deductibles / Assignable No Deductibles / Assignable
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Medium Term PolicyMedium Term Policy
Term: Term: 1-7 years (Export-Import Bank)1-7 years (Export-Import Bank) 15% Down 15% Down (Other Restrictions Apply)(Other Restrictions Apply) Comprehensive CoverageComprehensive Coverage Focus is more on Foreign Buyer Focus is more on Foreign Buyer
ObligationObligation Relatively Short Processing Relatively Short Processing Private Sector Programs Available Private Sector Programs Available
(AIG, EIC, FCIA, Unistrat, Zurich) (AIG, EIC, FCIA, Unistrat, Zurich)
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Evaluating an ApplicationEvaluating an ApplicationMajor Items NeededMajor Items Needed
Financial StatementsFinancial Statements Sales Volume - Domestic & Sales Volume - Domestic &
IntlIntl Average A/R BalanceAverage A/R Balance 3-year Loss History3-year Loss History Analysis of Credit ProceduresAnalysis of Credit Procedures Financial Information on Top Financial Information on Top
Tier Buyers - Financials, Tier Buyers - Financials, Bank & Trade References, Bank & Trade References, Favorable Credit Agency Favorable Credit Agency ReportsReports
Desired Credit LimitsDesired Credit Limits For Export Programs, sales For Export Programs, sales
by country breakdownby country breakdown
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Pricing Based OnPricing Based On
Country RiskCountry Risk Industry RiskIndustry Risk Buyer RiskBuyer Risk Terms of Payment Terms of Payment (the more liberal your (the more liberal your
terms, the less quality in your A/R – time terms, the less quality in your A/R – time increases uncertainty of payment ) increases uncertainty of payment )
Loss RecordLoss Record Deductible (losses/sales X projected Deductible (losses/sales X projected
sales)sales)
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Benefits to ExporterBenefits to Exporter
Enhance Overall CompetitivenessEnhance Overall Competitiveness Contribute to Bottom LineContribute to Bottom Line Improve Cash FlowImprove Cash Flow Reduce DSOReduce DSO Lower Loss ReservesLower Loss Reserves Increase Collateral Base & Borrowing PowerIncrease Collateral Base & Borrowing Power Mitigate Chances of Payment DefaultMitigate Chances of Payment Default And, Premiums are Tax DeductibleAnd, Premiums are Tax Deductible
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Benefits to Foreign BuyerBenefits to Foreign Buyer
L/C Costs AvoidedL/C Costs Avoided Not Forced to Borrow LocallyNot Forced to Borrow Locally U.S. Interest RatesU.S. Interest Rates 100% Financing of Short-Term 100% Financing of Short-Term
Credits Credits
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Replace Letters of Credit
L/Cs do Not guarantee payment L/Cs require expertise L/C may cost the sale L/Cs tie up buyer’s funds or credit Insurance eliminates high local int. rates Insurance eliminates buyer’s bank fees Insurance builds customer loyalty
2020
List of InsurersList of Insurers ACEACE AIGAIG AtradiusAtradius Coface North America Coface North America Euler Hermes (ACI)Euler Hermes (ACI) Export-Import Bank of the USAExport-Import Bank of the USA FCIAFCIA HCCHCC ZurichZurich