international risk consultants political risk, credit insurance, and trade finance solutions credit...
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Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Credit Insurance: Valuable Tool for Domestic & International Credit
Management
Presented to
NACM Gateway Regionby
Mark RegenhardtSeptember 18, 2007
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Agenda• Recent Industry Trends• Types of Credit Insurance• Distribution Channels• Sample Policy Structures• Claims Process & Recoveries• Cost Benefit Analysis• Open Account Customer Financing• Medium-term Insurance & Political Risk• Q & A
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Recent Industry Trends• Very soft market• Concern over tightening in credit• High demand in certain industries• Low claims• Several new players• Consolidation Over• Insurers selling information• Select risk is possible• Growth in global policies
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
What Does Credit Insurance Cover?
Non-payment of trade obligations for political or
commercial reasons:
• Political Risks (foreign transactions): Government acts/political events that restrict payment Currency inconvertibility (aka, transfer risk) War, riot, insurrection or civil disorder Embargo Terrorism
• Commercial Risks (foreign and domestic) Commercial bankruptcy or legally protected reorganization Protracted default (aka, slow pay)
• Exclusions include disputes
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Why Use Credit Insurance?
• Risk mitigation• Increase sales via open account• Facilitate financing or sale of A/R• Access insurers information/database• Reduce collection expenses• Standardize credit decision process
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Credit Alternatives Vs. Risk
CUSTOMER DESIRE
REPAYMENTRISK
Insured
O/A
High High
Low Low
CIA Letter of Credit Documentary Collection Open Account
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Types of Credit Insurance
• Short-Term Credit InsuranceExport & domestic coverage covering non-
payment of A/RSingle and multi-buyer programsSupports up to one year repayment terms
• Medium-Term Credit Insurance Facilitates LIBOR-based equipment and project
financing for foreign obligorsSupports up to 1 to 5 year repayment terms
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
North America:Short-term Credit Insurers
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
North America:Medium-term Credit Insurers
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Credit Insurance Distribution Channels
• Captive Sales Agents (Euler, Atradius & Coface)
• Generalist Brokers
• Specialist Brokers
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Credit Insurance Policy Types• Single Buyer (Export and Domestic)
Short Term: Supports up to 1 year repayment terms Medium Term: 1 to 5 year terms Long Term: 5 to 7 years Banks or corporations can be the insured (policy holder)
• Multi-Buyer (Export and Domestic)
Whole-Turnover Key Account (ex. Top 20 Buyers) Select Risk (ex. Latin America Only) Banks or corporations can be the insured (policy holder) Usually short-term cover but medium-term multi-buyer
cover is possible
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Multi-Buyer Credit InsuranceStyles of Underwriting
• Excess-of-Loss Policies with deductibles and discretionary authority Insured continues to make own credit decisions for most
buyers American Style Underwriting Insurers include AIG, FCIA, Ex-Im Bank, HCC, QBE, ACE
• Ground-Up: Policies with low or zero deductibles and low or zero
discretionary authority Insurance company makes most or all credit decisions European Style Underwriting Insurers include Atradius, Coface, and Euler
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Common Credit Insurance Parameters
• Policy Limit of Liability
• Deductible
• Indemnity (inverse of co-insurance)
• Premium Rates (Sales or Limits Based)
• Minimum Premium
• Credit Limits
• Non-Qualifying Loss
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Short-term Multi-buyer Key Account Policy
• Limit of Liability (LOL): $30,000,000• Indemnity: 90%• Deductible: None• Largest Buyer Limit: $30,000,000• Transaction Tenors: 30 – 120 days O/A• Insurers: Two – Syndicated 50/50• Waiting Period: 90 days• Countries: Peru, Mexico, Italy, U.S. & Canada• No. of Buyers: 10• Premium rate: $0.065 per $100
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Short-term Single-buyer Policy
• Limit of Liability (LOL): $30,000,000• Indemnity: 80%• Deductible: None• Transaction Tenors: 120 – 240 days O/A• Insurers: One• Waiting Period: 90 days• Country: Various• Premium rate: None, Flat $300,000• Collection Fees: None
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Typical Credit Insurance Policy
Credit Insurance Policy HQ, St. Louis, MO
Additional Insured, TX
Additional Insured, IL
Additional Insured, KS
ClaimPayment
Reports & Premium
Insurer
Broker
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTSGlobal Credit Insurance
Policy
Locally Sub-Policy
Brazil
Locally Sub-Policy
Mexico
InsurerU.S.A.
BrokerU.S.A.
Master Policy HQ St. Louis, MO
Reports & Premium
ClaimPayment
InsurerMexico
InsurerBrazil
BrokerBrazil
BrokerMexico
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Benefits of Global Policy(Global Negotiation- with Local
Service)• Global & Centralized Policy Negotiation
• Local Language Service & Support
• Compliance with Local Insurance laws
(which differ by country)
• Premiums Are Fully Tax Deductible
• Claim Payments Match Country of Loss
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Policy Administration• Sales reporting & premium payment
• Qualifying customers for insured lines of credit
• Past due reporting
• Cease-shipment or automatic withdrawal of cover provisions
• Rescheduling of debt must be pre-approved
• Claim deadlines and “satisfactory” filing of claim form and supporting documents
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Syndicated Policy• Multiple Insurers - one
policy
• Increasing in popularity
• Can be for one or multiple buyers
• Insurers agree to pricing and other policy terms
• Leverages global insurance capacity
Insurer No. 1
$10 Mil.Buyer Limit
Insurer No. 2
$10 Mil. Buyer Limit
$30 Mil. Total Buyer Limit
Insurer No. 3
$10 Mil. Buyer Limit
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Top-up Policy• Two or more policies
• Can be for one or multiple buyers
• Common with existing policies
• Price varies by layer
• Layer 2 lower priced than Layer 1
Primary Insurer Policy 1
$15 Mil.
$30 Mil. Total Buyer Limit
ExcessInsurer Policy 2
$15 Mil.
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Claim Payment Flow Chart
Invoice Period
30 Days
Waiting Period
0 - 90 DaysPast Due
Claim Processing
Period
30 – 60 Days
Claim Payment
** Collection EffortResponsibility of Insured
Collection Expense Paid by Insurer
Collection Expenses Avoided by Insured
** Some Insurers Indemnify this expense
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Sample Claim Payout
$1,000,000Bad Debt
$750,000Insured
Limit
$1,000,000Total Claim
Claim Payout $750,000 x 90% = $675,000
$675,000Claim
Payment
$1,000,000Total Claim
Recovery Sharing %$675,000/$1,000,000 =
67.5% Insurer, 32.5% Insured
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Recovery Scenario (After Claim Payment)
$100KRecovered
From Debtor15% Insurer Collection Expense
$85KNet
Recovery
$675KClaim
Payment
$1,000KTotal Claim
Recovery Sharing %Insurer $85K X .675 = $57.3K
Insured $85K X .325 = $27.7K
$27K Recovery
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Top Reasons for Claim Denial• Unresolved disputes
• Failure to meet credit limit requirements
• Non-payment of premium
• Past-due reports not filed
• Shipments made when customer had excessive past dues
• Late claim filing
• Unauthorized debt restructuring
• Key required documents missing
• Documents not properly executed
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Cost Benefit AnalysisAssumptions:• Insured sales: $30,000,000• Gross margin: 20%• 50%/50% domestic/export• Premium rate: $0.20 per $100• Estimated premium: $60,000• Largest credit limit: $3,000,000• Average credit limit: $250,000
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Cost Benefit Analysis• Incremental Sales Needed to Pay for Policy: $60,000/.20 = $300,000 or 1%
• Incremental Credit Limit Needed to Pay for Policy:
$300,000/6 = $50,000 (60 days O/A)
• Incremental Sales Needed to Pay for Largest Loss:
$3,000,000/.20 = $15,000,000 or 50% !
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Profit & Loss Impact
(‘000) No Ins. InsuredRevenue: $30,000 $30,000Profit (20%) $6,000 $6,000Less Bad Debt: $3,000 $300Less Insurance: $60Net Profit: $3,000 $5,640
Savings $2,640 / $60 = 44 Year Payback Return
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Open Account Trade Finance Program
• Insurance + Bank A/R purchase program = open account trade finance program
• Reduces cash flow burdens of the customer
• Credit insurance protects the balance sheet as sales and A/R exposure grows
• DSO rises, so exporter sells the insured foreign A/R to bank monthly or bi-monthly
• Pass bank finance and insurance costs to customer, perhaps even adds a small margin for especially long terms
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Sample Bank Term Sheet forA/R Purchase Facility
Recent term sheet from a large commercial bank for a $15 million foreign receivable purchase facility. Terms included:
• Credit insurance required with assignment of proceeds to bank
• Supported invoiced terms of up to 180 days
• A/R sale/purchase could be made weekly or bi-weekly with a $500,000 minimum purchase per transaction
• Bank purchases title to invoices and pays 90% (the amount of insurance indemnity) of the face value of invoices less the bank's "Discount Margin“
• The bank's "Discount Margin" was LIBOR + 0.75% per annum, calculated on the basis of 90% of the face value of each invoice purchased
• Seller retains "First Loss Deficiency Guarantee" of $150,000 to match the credit insurance policy deductible
• One-time structuring fee: $25,000
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
General Structure (Relative to Previous Sample Bank Term Sheet)
• Credit insurance policy issued to exporter
• Insurance attaches when shipment is made or service rendered
• Bank that purchases insured A/R is assigned as Loss Payee Claim payments made to bank
• Exporter/insured must retain policy risk retention Bank has recourse back to exporter for uninsured amounts
(deductible, co-insurance, or non-compliant A/R)
• Exporter responsible for administration of insurance policy
• A/R Collection Bank buys A/R and hires exporter back as the servicing agent on
what is now the bank’s asset, or Bank services/collects the A/R on its own
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Insured/Seller
Customer
Insurer Bank
4. In
voic
e
6.
Paym
en
t
2. Receivable
Purchase
Agreement
1. Credit Insurance
Policy
3. Assignment of Insurance Policy Proceeds
5. Receivable
Purchase
Supplier Credit Receivable Finance Program (Insurance
Backed)
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Alternative Structure: Bank as the Insured
• Credit insurance policy issued to bank May be of greater interest to bank for purchases of Largest
Accounts A/R (such as Top 10 customers)
• Coverage attaches once bank purchases the A/R from exporter
• Claims filed by the bank
• Bank must retain policy risk retention Bank generally cannot have recourse back to exporter (A/R seller)
for uninsured amounts (deductible, co-insurance, or A/R out of compliance)
• Bank responsible for administration of insurance policy Bank must collect all necessary documentation from A/R
seller/exporter to ensure it can file a complete and satisfactory claim
• A/R Collection Bank buys A/R and hires exporter back to be servicing agent on
what is now the bank’s asset, or Bank services/collects the A/R on its own
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Seller
Customer
Insurer
Bank/Insured
3. In
voic
e 5. Pay
men
t
1. Credit Insurance Policy
4. Rece
ivable
Purchase
Buyer Credit Finance Program
2. Loan
Agreem
ent
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Medium-Term Credit Insurance
• “Medium-Term” defined as transactions with repayment terms greater than one year
• Available for capital equipment or project financing transactions
• Supports LIBOR-based loans by a U.S.A. bank to overseas buyers
• Maximum terms to dealers is 2 years
• Maximum terms to end-users is up to 5 years (depending on transaction size)
• Semi-annual payments of principal + interest
• Transaction backed by comprehensive (political & commercial) credit insurance
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Ex-Im Bank MT Basics• Coverage carries full faith & credit of U.S. government
• Limited coverage for foreign content
• 15% minimum down payment required
• 100% indemnity on amount financed
• Equal semi-annual payments of principal + interest
• Flat rate premium based on country, payment terms, disbursement period, and financial strength of obligor
• Buyer or supplier credit structure
• Standard documentation used for obligors in any country
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Private Sector MT Basics• Unlike Ex-Im Bank, private insurers typically structure
coverage with 90% indemnity
• Typically an alternative when foreign content precludes Ex-Im Bank coverage
• No down-payment requirements
• Underwriting criteria less stringent and application process less cumbersome than Ex-Im Bank, and turn-around times are much faster in the private market
• Bank funds the MT notes but will need recourse back to exporter for the uninsured portions in the event of a default
• Private insurers require exporter to develop legally enforceable promissory note and other documentation
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Private InsurersMaximum Terms
Insurer Maximum Terms
• AIG 3 years• FCIA 5 years• EIC 5 years• Atradius 5 years• Coface 5 years• HCC 5 years• Zurich 7 years
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Why Use Political-Risk Insurance?
• Protect overseas assets against Confiscation, Expropriation, Nationalization (CEN) and Political Violence (PV)
• Obtain Currency Inconvertibility (CI) cover to protect profit repatriation from foreign operations
• Protect against wrongful-calling of guarantees
• Cover trade transactions with sovereign obligors
• Protect against Contract Repudiation or Non- Delivery
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Thank YouMark RegenhardtInternational Risk Consultants, Inc.212 Crystal StreetSuite BCary, IL 60013
Tel 847-462-0547Fax 614-224-7901Cell 847-651-0851
E-mail: [email protected]: www.irc-group.com