Insight into Trade Credit Insurance

HDFC ERGO General Insurance Company Limited

 Topics

• Credit Insurance
– Policy Cover / Not Covered
– Why Credit Insurance
– Specific Guidelines for Credit Insurance In India –
IRDA
– Credit Insurance In Practice - Timetable

• Processes
– Buyer Risk Assessment
– Risk Underwriting & Buyer Credit Limit
– Online Access and Credit Limit Decision in a Click
– Obligation of the Insured

• Pricing

• Retained Risk and Deductibles

• Claim Process

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 Understanding Trade Credit Insurance

Methods of Payment
Secured Payment
Cash

Bank Guarantee / Letter of Credit

Un secured Payment
Open Terms

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 Policy Covers

What is covered?
Non payment of the buyer when selling on credit terms due to:

Commercial Risk :
Protracted Default – Delayed payments
Domestic Policy

Insolvency of Buyers

Export Policy
Political Risks Covers non payment due to
Moratorium
Transfer Restriction / Inconvertibility
War
Import/ Export Restriction
Natural Disaster
License Cancellation

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 What is not covered?

Default of insured, Arrangements/compromises

Disputed debts agents/employees without our approval

Buyers with debt

already outstanding
greater than 60 days Sales to subsidiaries
past due (Controlling interest)
Exclusions
Claims in excess of
approved credit limits

Dishonesty / Fraud Interest / Penalty

of Insured

Government Violation of credit

bodies Currency management procedures
fluctuations

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 Advantages of Credit Insurance : Balance Sheet Protection

80 : 20
■ If you are like most companies, 80% of your business comes
from 20% of your customers. What if one of your best customers
were to unexpectedly stop paying due to bankruptcy, etc.?

Improve your income

E ■ Manage your bad debt reserve and write-offs with greater
E RV certainty – bringing some reserves back to income
S
T RE
B
DE
D
BA Improve cash flow
■ Improve your cash-flow with improved
O DSO
DS
Increase your sales
D ■ May allow you to offer open account
IO
P ER
T terms
E DI
CR ■ Assists you with entry into new markets
■ Enables you to possibly sell more
goods / services on longer credit terms.

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 Enhanced credit management

Unbiased, third party credit opinions

Continuous monitoring of buyer risks

Reduce your credit investigation costs

Collections

Easier to forecast your premiums & write-offs

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 Guidelines for Credit Insurance In India

- IRDA circular as on 10-03-2016

Whole Turnover policy only allowed

Cover a particular Segment/ Product / Country on

Whole turnover basis

Indemnity Level 85% only

Assignment of proceeds of a claim under a trade

credit policy may be made to a Bank/NBFC

registered with RBI

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 Credit Insurance In Practice - Timetable
Claim /
Contract signed Dispatch & invoice Due date Probable loss Ascertainment of loss

Waiting period

e.g. 120 days up to

e.g. 60 days Protracted Default

Pre-credit Credit risk period Max extension

period period (MEP)

Maximum payment terms

e.g. 120 days Notification of probable loss /
(within 30 days of MEP expiry)

Invoicing
Credit limit period Apply internal No cover for future Date of loss /
decision (max 30 credit management deliveries submit claim
days procedures for within 3 months
from recovery from MEP
dispatch)

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 Processes

Buyer Risk Assessment

Risk Underwriting and Buyer Credit Limit
Online Access
Obligation of the Insured

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 Risk Underwriting & Buyer Credit Limit
• All buyer are assessed and individual buyer limit are assigned

• Limit fixation exercise is dynamic process where the limit can be agreed in full, partial or
declined with reasons

• Decline limits, partial limit can be re-appealed with supporting documents such as trading
experience, latest financial information etc.

• Risk assessment based on financial non-financial, industry trends, growth and industry
trends

• TPE Exposure - Cumulative credit limits shouldn’t exceed 60% of Estimated insurable
turnover.

Discretionary Credit Limit

• Discretionary credit limit is a fixed level above which the insured need to apply for credit
limits and are covered under the policy subject to fulfilment of DCL criteria as per policy.

• DCL is extended only to insured with large number of buyers and who have prudent
internal credit management practice in place.

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 Online Access-
Policy And Credit Limit Information In A Single Click

Online System access

• Application of Credit Limits,
• Downloading Credit Limit Report In Excel.
• Automatic Decisions Emailed to Client
• Notification of Non Payments

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 Obligations of the Insured

• Timely payment of Premium and Credit limit fees

• Prompt invoicing of sales – Within 30 days from dispatch
• Monthly statement of turnover
• Declaration of overdue accounts >90 days
• Prompt notice/intimation of defaults/ cheque bounce
• All rights of insured debts to be preserved and exercised
• Documentary proof of non-payment
• Confirmation of debt for insolvency

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 Pricing and Cost
Retained Risks and Deductibles

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 Pricing

• Insurable turnover
• Credit period or maximum credit period
• Number of buyer and spread of buyers
• Trade sector
• DSO or average collection period
• Historical losses
• Current overdue position
• Internal credit management control
• Countries where buyers are located in case of exports
• Buyers grading

Cost
• Premium is chargeable on estimated insurable turnover
• Procession fee of INR 2000 for each domestic buyer and INR 3000 for export buyer
(to be collected at inception of policy)

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 Retained Risks and Deductibles

• Each And Every Loss – the amount to be deducted from each claim payment to be
kept for the account of the insured.
• Non Qualifying Loss/ Threshold – the amount below which losses do not qualify for
indemnification and are to be kept by the insured for their own account.
• Aggregate First Loss – total first loss amount to borne by insured of the total loss
reported in the policy
• Insured percentage (element of co-insurance) 85% indemnity

As per policy loss limitation

• Credit limit per buyer
• Maximum Liability (IML) usually 40 times annual premium paid

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 Claims

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 Claim Process
• Notification of non payment (NNP) to be lodged within 90 days of a debt becoming overdue

• Formal claim to be lodged within 3 months from MEP

• Documents to be enclosed (as per next slide)

• On receipt of all documents Claim Assessment will be done within the next 2 months
Case is assessed based on following
1) Limits are in place & invoices are declared.
2) Invoices are within policy period.
3) We draw up reconciliation & check whether there is MEP breach.
4) Disallow unacceptable debt if any e.g. Bank charges, interest etc.
5) Claim amount is greater than NQL ( Non Qualifying Loss)
6) Apply indemnity % of loss.
Application of deductibles if any
7) Deduct excess
8) Annual First Loss (AFL) – positive balance after deducting AFL then the claim is paid or else adjusted against AFL.

• Once claim has been assessed the following is required
• Authority letter for appointment of debt collection agency (case to case basis)
• CA certified ledger account of debtor - after claim is approved.
• Post claims assessment we will require letter of subrogation
• Letter of subrogation – needs to be signed by 2 directors or 1 director and have a company seal

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 Documentation Required

– Claim Form Duly Signed and Stamped.

– Copies of defaulted Invoices acknowledged by buyer.
• Evidence of Payment Terms if is it not showing in Commercial Invoices. ( E.g. contract copy)
– Debtor’s ledger for the 12 months prior to the oldest outstanding invoice in excel format.
– Evidence of Credit Limit / DCL buyer.
• If DCL buyer evidence of DCL condition being fulfilled.
– Proof of Delivery - LR(Domestic), Bill of Lading.( Export) etc.
– Evidence of Debt.
– If PDC is available, then
• Copy of dishonored-cheque , Bank Advice, Notice under Sec-138 with acknowledgment of
receipt by buyer , Petition
under Sec-138 with court case number
• Any other legal case papers
• Correspondence exchanged with Debtor for recovery

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 Key differentiator/ Unique Proposition

• No Intervention Fees
• Recoveries post indemnification/ (settlement of claim) – are shared in proportion of liability -
• For E.g. If indemnity is 80%; (limit & exposure – 100,000)- claim paid 80,000
– Instance1: Recovery 50,000– Insurer retains 40,000 & 10,000 is shared with insured
– Instance2: Recovery 100,000- Insurer retains 80,000 & 20,000 is shared with insured

V/S

• Most insures post payout, seek to indemnify their share first and the insured later.
– Instanace1: Recovery 50,000- Insurer retains 50,000 until first 80,000 claims are recovered
only subsequent recoveries are shared with the insured

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 Recap...

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 Thank You

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