Transcript Document

INTERNATIONAL RISK CONSULTANTS
Credit Insurance: Valuable Tool for
Domestic & International Credit
Management
Presented to
NACM Gateway Region
by
Mark Regenhardt
September 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):
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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
REPAYMENT
RISK
High
High
Insured
O/A
Low
CIA
Letter of Credit
Account
Low
Documentary Collection
Open
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Types of Credit Insurance
• Short-Term Credit Insurance
 Export & domestic coverage covering non-payment
of A/R
 Single and multi-buyer programs
 Supports up to one year repayment terms
• Medium-Term Credit Insurance
 Facilitates LIBOR-based equipment and project
financing for foreign obligors
 Supports 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)
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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)
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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 Insurance
Styles 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
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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
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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
Insurer
Reports &
Premium
Claim
Payment
Broker
Credit Insurance Policy
HQ, St. Louis, MO
Additional
Insured, TX
Additional
Insured, IL
Additional
Insured, KS
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INTERNATIONAL RISK CONSULTANTS
Global Credit Insurance Policy
Insurer
U.S.A.
Reports &
Premium
Broker
U.S.A.
Claim
Payment
Master Policy
HQ St. Louis, MO
Locally
Sub-Policy
Brazil
Broker
Brazil
Insurer
Brazil
Insurer
Mexico
Broker
Mexico
Locally
Sub-Policy
Mexico
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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
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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
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INTERNATIONAL RISK CONSULTANTS
Syndicated Policy
• Multiple Insurers - one
policy
• Increasing in popularity
• Can be for one or multiple
buyers
$30
Mil.
Total
Buyer
Limit
Insurer Insurer Insurer
No. 1
No. 2
No. 3
$10 Mil. $10 Mil. $10 Mil.
Buyer
Buyer Buyer
Limit
Limit
Limit
• Insurers agree to pricing and
other policy terms
• Leverages global insurance
capacity
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INTERNATIONAL RISK CONSULTANTS
Top-up Policy
• Two or more policies
Excess
Insurer Policy 2
$15 Mil.
• Can be for one or multiple
buyers
• Common with existing
policies
• Price varies by layer
$30
Mil.
Total
Buyer
Limit
Primary
Insurer Policy 1
$15 Mil.
• Layer 2 lower priced than
Layer 1
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Claim Payment Flow Chart
30 Days
Invoice
Period
0 - 90 Days
Past Due
Waiting
Period
** Collection Effort
Responsibility of Insured
** Some Insurers
Indemnify this expense
30 – 60 Days
Claim
Processing
Period
Claim
Payment
Collection Expense
Paid by Insurer
Collection Expenses
Avoided by Insured
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Sample Claim Payout
$1,000,000
Bad Debt
$675,000
Claim
Payment
$750,000
Insured
Limit
$1,000,000
Total
Claim
$1,000,000
Total
Claim
Claim Payout
$750,000
x 90% =
$675,000
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)
$100K
Recovered 15% Insurer
From Debtor Collection
Expense
$27K Recovery
$675K
Claim
Payment
$1,000K
Total
Claim
$85K
Net
Recovery
Recovery
Sharing %
Insurer $85K X .675 = $57.3K
Insured $85K X .325 = $27.7K
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 Analysis
Assumptions:
• 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)
Revenue:
Profit (20%)
Less Bad Debt:
Less Insurance:
Net Profit:
No Ins.
$30,000
$6,000
$3,000
$3,000
Insured
$30,000
$6,000
$300
$60
$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 for
A/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
Supplier Credit Receivable Finance
Program (Insurance Backed)
3. Assignment of Insurance Policy Proceeds
Insurer
Bank
Insured/
Seller
4. Invoice
Customer
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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
Buyer Credit Finance Program
1. Credit Insurance Policy
Insurer
Bank/
Insured
Seller
3. Invoice
Customer
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 Insurers
Maximum Terms
Insurer
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AIG
FCIA
EIC
Atradius
Coface
HCC
Zurich
Maximum Terms
3
5
5
5
5
5
7
years
years
years
years
years
years
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 NonDelivery
Political Risk, Credit Insurance, and Trade Finance Solutions
INTERNATIONAL RISK CONSULTANTS
Thank You
Mark Regenhardt
International Risk Consultants, Inc.
212 Crystal Street
Suite B
Cary, IL 60013
Tel 847-462-0547
Fax 614-224-7901
Cell 847-651-0851
E-mail: [email protected]
Web: www.irc-group.com
Political Risk, Credit Insurance, and Trade Finance Solutions