Book contents
- Frontmatter
- Contents
- Foreword
- Introduction
- Disclaimer
- Chapter 1 What is trade?
- Chapter 2 What is trade credit insurance?
- Chapter 3 Product types
- Chapter 4 Risk types
- Chapter 5 Typical set-up of a trade credit insurance contract
- Chapter 6 Premium, the price for cover
- Chapter 7 Day-to-day policy management
- Chapter 8 Buyer risk underwriting in trade credit insurance
- Chapter 9 Debt collection
- Chapter 10 Imminent loss and indemnification
- Chapter 11 Renewal, expiry, termination of a policy
- Chapter 12 Single risk business
- Chapter 13 The single risk insurance market: Private and public players
- Chapter 14 Reinsurance of Trade Credit Insurance
- Trade Credit Insurance resources
- Glossary of trade credit terminology
Chapter 14 - Reinsurance of Trade Credit Insurance
Published online by Cambridge University Press: 18 January 2018
- Frontmatter
- Contents
- Foreword
- Introduction
- Disclaimer
- Chapter 1 What is trade?
- Chapter 2 What is trade credit insurance?
- Chapter 3 Product types
- Chapter 4 Risk types
- Chapter 5 Typical set-up of a trade credit insurance contract
- Chapter 6 Premium, the price for cover
- Chapter 7 Day-to-day policy management
- Chapter 8 Buyer risk underwriting in trade credit insurance
- Chapter 9 Debt collection
- Chapter 10 Imminent loss and indemnification
- Chapter 11 Renewal, expiry, termination of a policy
- Chapter 12 Single risk business
- Chapter 13 The single risk insurance market: Private and public players
- Chapter 14 Reinsurance of Trade Credit Insurance
- Trade Credit Insurance resources
- Glossary of trade credit terminology
Summary
Reinsurance is – simply stated – ‘insurance of insurance’. In fact, most of the principles ruling insurance such as self-retention, etc. are common also to reinsurance. In this chapter we will look at the use of reinsurance in trade credit insurance, explaining more in detail some basic reinsurance principles and how they fit to trade credit insurance.
Why reinsurance? – Use and purpose of reinsurance
Reinsurance is a powerful instrument serving the following purpose: It absorbs losses and stabilises the insurance company's results, and by so doing, it effectively and efficiently acts as a capital substitute. By replacing capital, insurers are able to grow their business. How much losses the insurer wants to transfer to reinsurers and subsequently how much capital relief the insurer will obtain, will depend on its risk appetite and overall (regulatory, internal and rating) capital requirements.
The importance and use of reinsurance varies according to the line of insurance business. ‘Commoditized’ insurance lines such as life insurance, household, motor, etc. generally require less reinsurance than ‘Special’ insurance lines such as agriculture, engineering and/ or trade credit and surety. Why?
• Limited access to outside capital: Trade credit insurers have always been specialized insurance companies; besides the complexity of the product itself, high entry barriers and high sunk costs in establishing new ‘greenfield operations’ constitute big obstacles to potential competitors and to potential capital providers when it comes to financing the business. External sources of capital are therefore rare, so reinsurance can be considered being a suitable capital provider.
• High degree of specialization: The niche character of this business results in very few people having thorough knowledge about trade credit insurance outside of the insurance and reinsurance industry.
• Low diversification: Until 1990 trade credit insurers’ portfolios were largely focused on their domestic boundaries: a German trade credit insurer would insure almost only domestic trade credit in Germany, a French insurer only French trade credit, etc. These portfolios would to a great extent follow their own country's economic cycle. As a consequence, whatever economic downturns affected one country (e.g. crisis of construction sector in Germany), the credit insurer's portfolio would immediately be hit, resulting in very high loss ratios. With lack of outside capital sources, the only way to efficiently absorb such high loss ratios was by way of reinsurance.
- Type
- Chapter
- Information
- A Guide to Trade Credit Insurance , pp. 131 - 148Publisher: Anthem PressPrint publication year: 2015