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9054 results in Finance and accountancy

Page 189 of 453

Stochastic Interest Rates
  • Daragh McInerney, Tomasz Zastawniak
  • Published online:
    05 June 2015
    Print publication:
    10 August 2015
  • This volume in the Mastering Mathematical Finance series strikes just the right balance between mathematical rigour and practical application. Existing books on the challenging subject of stochastic interest rate models are often too advanced for Master's students or fail to include practical examples. Stochastic Interest Rates covers practical topics such as calibration, numerical implementation and model limitations in detail. The authors provide numerous exercises and carefully chosen examples to help students acquire the necessary skills to deal with interest rate modelling in a real-world setting. In addition, the book's webpage at www.cambridge.org/9781107002579 provides solutions to all of the exercises as well as the computer code (and associated spreadsheets) for all numerical work, which allows students to verify the results.

  • Chapter 11 - Renewal, expiry, termination of a policy

  • The International Credit Insurance & Surety Association
  • Book:
    A Guide to Trade Credit Insurance
    Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015, pp 95-98

  • Summary

    Nothing lasts forever and that is also true for trade credit insurance policies. The policy becomes effective at the inception date and at the end of the insurance period decisions are to be taken with respect to (automatic) renewal, expiry or termination of the policy as well as the applicable conditions with respect to risks that commenced during the insurance period and did not yet lead to payment or indemnification.

    RENEWAL

    Most whole turnover policies include conditions for automatic renewal, which occurs at the end of the insurance period, unless the insurer or the insured wants to terminate the policy and notifies the contractual partner with due observance of a notification period of (mostly) two months.

    The insurer may decide to renew the policy under the condition of an increased premium rate, because of the negative results under the policy, the deterioration of the creditworthiness of buyers and countries insured under the policy or the implementation of increased premium rates for all his buyers. After timely announcement of new (premium) conditions and a possible negotiation with the insured, the policy may be renewed or not.

    Many policies contain a bonus/malus arrangement by which the insured can expect a decrease or increase of the premium rate, depending on the claims ratio of the policy. The calculation of the claims ratio requires special attention.

    Under a ‘risk attaching’ policy the claims ratio should be calculated by taking into account the premium paid for credit risks commenced in an insurance period and allocating possible claims to the same period. Late indemnifications or recoveries may lead to an adjustment of the claims ratio and its consequences for the premium in a new insurance period.

    Some insurers and many insured prefer a calculation of the claims ratio on a cash basis. Regardless of the insurance period in which the risks commenced, they take the premium paid during the last insurance period and the indemnifications paid in the same period, by some insurers decreased by the recoveries received by them during the last insurance period.

    In case the insured is entitled to receive a bonus, one of the conditions may be that the policy will be renewed.

A Guide to Trade Credit Insurance
  • The International Credit Insurance & Surety Association
  • Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015
  • A Guide to Trade Credit Insurance' is a reference book on trade credit insurance, written from an international perspective. It is a compilation of contributions from various authors and reviewers drawn from ICISA member companies. The book provides an overview of the whole process regarding trade credit insurance, including the history of trade credit insurance, trade credit insurance providers, the underwriting process, premium calculation, claims handling, case studies and a glossary of terminology.

  • Chapter 3 - Product types

  • The International Credit Insurance & Surety Association
  • Book:
    A Guide to Trade Credit Insurance
    Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015, pp 15-20

  • Summary

    There are various ways to categorize the trade credit insurance products (‘policies’) that credit insurance companies offer to the market.

    1. LEVEL OF SELECTION

    One of the ways to classify policies is according to the level of risk selection that the trade credit insurance allows. To what extent and under what conditions these product types are actually available in general or in a particular situation will depend on the individual trade credit insurer's own offering strategy. Generally speaking: the better the spread of risk and the lower the possibility of antiselection, the higher the probability of acceptance by the trade credit insurer and the lower the relative costs (= premium) for the insured.

    a) Whole turnover

    This is the most traditional policy form that covers the entire business-to-business turnover of the insured company, that is, all business transactions with all their buyers (both current buyers and future buyers). From the point of view of the trade credit insurer, this ensures a maximum spread of the risk over buyers and buyer countries.

    b) Selected part of the turnover

    As long as the risk-to-premium profile remains acceptable, trade credit insurers are usually prepared to cover a selected part of the insured's turnover. For example: only the company's domestic sales, only their export business or only a specific division or a particular product line (such as cover for the delivery of printers, but not for the sale of spare parts or for the maintenance and service contracts).

    c) Selected buyers

    Cover can also be restricted to the turnover made with a number of selected buyers. This selection may be on fairly objective criteria such as cover only for buyers on which the outstanding amount exceeds a pre-agreed level (‘Datum line’) or cover only for the insured's largest x number of buyers (‘Key account’ or ‘Key buyer’). Such selection may also be on less objective criteria, covering a number of buyers that have been explicitly chosen by the insured.

    d) Single buyer

    In this case the insurance covers all sales transactions with one specific buyer only. An even further level of selection is single contract cover, where the policy covers only one single transaction with a single buyer.

  • Chapter 2 - What is trade credit insurance?

  • The International Credit Insurance & Surety Association
  • Book:
    A Guide to Trade Credit Insurance
    Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015, pp 7-14

  • Summary

    No matter how transparent an international trade transaction may be, it is not completed until payment is received. Businesses usually trade on open credit terms as an alternative payment instead of immediate cash payment to provide time for buyers to generate revenue from sales to pay for the delivery of goods and the performance of work or services. For those businesses this ‘account receivable’ is unsecured invested capital due to the commercial or political risk of non-payment or any payment delay.

    HISTORY, NATURE AND IMPORTANCE OF TRADE CREDIT INSURANCE

    The first hints of modern trade credit insurance came at the end of the 18th century. In 1766, a Prussian professor Wurms proposed to authorities a type of insurance to cover maritime risks in order to reduce losses caused to merchants.

    In 1839, an Italian, Bonajuto Paris Sanguinetti, published his work: ‘Essai d'une nouvelle théorie pour appliquer le système des assurances aux dommages des faillites’ (‘Essay of a New Theory to Apply Insurance to the Losses Caused by Bankruptcies’). He is considered the founder of Credit Insurance in a defined approach.

    In 1849 the Banque Mallet Frères et Cie in France was the first to cover trade credit risks, an example quickly followed by four other banks in Paris. After an initial great success these banks had to stop their credit insurance activities because of difficulties with the strict separation between banking and insurance. By supporting overdue buyers of their insureds, they sustained many losses and decided to cease writing credit insurance in France.

    The credit line is generally considered to have originated in the United Kingdom, where property and casualty insurers were already covering credit business in the middle of the 19th century, and from where credit insurance spread to continental Europe around the end of the 19th century.

    The oldest specialized credit insurer still operating today was founded in 1893 in the USA, but credit insurance never really took hold in the USA during the next 100 years. Only since about the turn of the millennium has credit insurance in the USA been undergoing a noticeable upswing, albeit still low in comparison to Europe.

  • Chapter 14 - Reinsurance of Trade Credit Insurance

  • The International Credit Insurance & Surety Association
  • Book:
    A Guide to Trade Credit Insurance
    Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015, pp 131-148

  • 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.

  • Chapter 10 - Imminent loss and indemnification

  • The International Credit Insurance & Surety Association
  • Book:
    A Guide to Trade Credit Insurance
    Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015, pp 83-94

  • Summary

    A trade credit insurance policy provides the insured with cover

    • for the non-payment risk;

    • for insured debts;

    • against insolvency of the buyer;

    • provided that all policy conditions have been complied with.

    According to the policy conditions the insured has to notify unpaid debts with a certain timeframe and ask for intervention of the insurer to collect the debt. The insurer will assess whether the insured has complied with all policy conditions and is eligible for cover and start the debt collection. In case all policy conditions have been met, indemnification will be made to the insured after the occurrence of a loss as described in the policy and the debt collection will be pursued, if possible. The indemnification and the allocation of recoveries will be dealt with at the end of this chapter.

    THE NON-PAYMENT RISK

    The supply of goods or the rendering of services on credit terms implies the risk for the supplier that payment will not be made in due course, and a loss occurs. This is the non-payment risk which can be divided into:

  • • the pre-credit or production risk: the risk that an order has to be cancelled during the production of goods, because the risk of non-payment due to financial problems of the buyer is too big; production costs already incurred cannot be recovered;

  • • the commercial risk: the risk that the buyer cannot pay the outstanding debt because of financial problems;

  • • the country risk or political risk: the insured does not receive payment of the outstanding debt because of political circumstances such as shortage of foreign currency, (civil) war, strikes, political unrest, natural disasters or non-payment by governmental buyers such as ministries, provinces, & municipalities.

    • Trade credit insurance provides cover for the above mentioned risks. One of the conditions for cover is that the debts qualify as insured debts.

    INSURED DEBTS

    The conditions of a credit insurance policy may include an explicit description of the causes of loss that are eligible for cover (positive risk description) or the causes of loss that are excluded from cover (negative risk description). Some policies contain a combination of both.

  • Chapter 13 - The single risk insurance market: Private and public players

  • The International Credit Insurance & Surety Association
  • Book:
    A Guide to Trade Credit Insurance
    Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015, pp 125-130

  • Summary

    PARTICIPANTS. A BRIEF INTRODUCTION

    Research has shown the origins of trade credit export insurance in certain commercial transactions in Egypt, Mesopotamia and Rome. These were single transactions backed by a guarantor that obtained a commission for the service provided. Some additional information is to be found in Chapter 2.

    The definitive push toward a trade credit insurance market took place in the 1960s when the proliferation of credit in international transactions and the growth of domestic and export markets made it necessary to discover and develop mechanisms to protect against payment defaults.

    The deferral of payment for the purchase of goods and services (i.e. extending credit) has on the one hand caused a significant increase of commercial transactions for many companies but, on the other hand, these same companies faced the threat of payment delays, extensions and bankruptcies that may seriously affect their own economic viability. Jean Bastin defines credit insurance as ‘a safety system that allows creditors, after the payment of a premium, to be insured against the non-payment of credits due from specific corporations’. Professor Jacques Janssen goes on to state that ‘(credit insurance) is a contract on behalf of which the insurer guarantees the insured, through a premium, the payment of a certain amount in case of the occurrence of a certain risk.’

    The three essential terms in this short definition are the premium, the amount insured and the risk insured.

    THE ROLE OF THE STATE

    Exports are a large part of the GDP (private consumption + gross investment + government spending + (exports-imports)) of any country in the world. Over the last sixty years all OECD economies have tried to promote exports using various schemes, mainly involving financing and insurance. The other driver of the export growth is demand, which is derived from consumption, investment and government spending; however, each of these drivers have been adversely affected by the economic crisis of 2008–2012.

    These factors, plus trying to balance the payments of each economy are the main reasons why, worldwide, different states are continuing to support schemes to boost sales beyond their borders. One such scheme with the most useful longest tradition is credit insurance. As we have explained, exports, financing and insurance are three corners of the same triangle.

  • Chapter 9 - Debt collection

  • The International Credit Insurance & Surety Association
  • Book:
    A Guide to Trade Credit Insurance
    Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015, pp 75-82

  • Summary

    One of the important pillars of the trade credit insurance policy is debt collection in case receivables remain outstanding after due date of the invoice. Insurers require from their insured a good credit management and monitoring of outstanding receivables. This is of course in the interest of any supplier of credit, whether credit insured or not. Unpaid invoices can have a serious impact on the insured's turnover or cash flow.

    As soon as the insureds become aware that a claimable event is imminent or has actually occurred, they are obliged to take all necessary or expedient actions and to exercise all due diligence to avert or to mitigate the claim. This includes in particular drawing down securities, exercising his rights to retention of title and, if necessary, taking court action to recover the receivables. In doing so the insured is obliged to follow the insurer's instructions and to obtain the insurer's prior consent before concluding any composition arrangements, agreeing to payment schemes or entering into similar agreements.

    The credit insurer expects the insured to conduct its buyer monitoring as if the credit were not insured. This means that it is expected the insured will spring into action if the invoice is still unpaid after the due date. Payment reminders should be sent to the buyer and/or phone calls should be made. This way possible disputes or complaints about deliveries can be detected in an early stage.

    Most policies give the insured the freedom to continue deliveries despite the outstanding invoices, realizing that few buyers have the habit of paying their bills in time. This grace period is usually called the maximum extension period, and it starts on the due date and ends 30, 60 or 90 days later depending on the policy conditions. The variable duration of the maximum extension period can be related to the specific country, sector or financial status of the buyer. Continuing deliveries during the maximum extension are of course subject to a sufficient credit limit.

  • Chapter 4 - Risk types

  • The International Credit Insurance & Surety Association
  • Book:
    A Guide to Trade Credit Insurance
    Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015, pp 21-36

  • Summary

    Trade credit insurance covers insured against the risk of non-payment by their buyers for goods and services delivered on credit terms. The types of risk causing the non-payment loss which trade credit insurers most commonly cover are insolvency, protracted default and political risks.

    COVERED RISKS AND CAUSES OF LOSS

    Insolvency can be defined as the institution of a judicial or administrative procedure whereby the assets and affairs of a legal entity (the buyer) are made subject to control or supervision by the court or a person or body appointed by the court or by law, for the purpose of reorganization or liquidation of the buyer or of the rescheduling, settlement or suspension of payment of its debts. The precise forms, names and terms of these insolvency procedures vary per country and jurisdiction. Insolvency may in shorter terms be described as the buyer's officially recognized inability to pay its creditors.

    Terms and conditions of insolvency cover may vary somewhat from insurer to insurer. For example, it is sometimes required that the debt is lodged in the insolvent estate and acknowledged, before the insurer proceeds to indemnify the insured's loss.

    Also, the policy's insolvency cover definition may include events that the trade credit insurer deems comparable to insolvency, for example, an extrajudicial settlement with all or the majority of the buyer's creditors or the execution of a court judgement that fails to satisfy the amount owing or the situation that starting an insolvency procedure against the buyer will have no cost effective result due to the buyer's weak financial position.

    The typical character of this cause of loss is that the loss for the insured is definite as soon as the buyer's insolvency has materialized, although the eventual amount of the loss may not be fully known and is depending on the chances of distribution of funds from the insolvent estate. As a consequence, normally all outstanding amounts on the buyer, whether they are already due or not at the date of insolvency, are indemnified under the trade credit insurance policy at once.

  • Introduction

  • The International Credit Insurance & Surety Association
  • Book:
    A Guide to Trade Credit Insurance
    Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015, pp ix-xii

  • Summary

    In 2007 the International Credit Insurance and Surety Association (ICISA) published the first edition of the Catalogue of Credit Insurance Terminology in order to clarify terms used in credit insurance for the benefit of anyone who is not familiar with them. The catalogue became a success and was translated into French, German, Italian, Spanish and Japanese. It forms the basis of the expanded ‘Glossary of trade credit terminology’ in this volume.

    In 2010 the Management Committee of ICISA approved the production of an ICISA book on trade credit insurance. The aim of this book is to have an industry-wide reference manual for the sector and to better position the trade credit insurance industry.

    The Credit Insurance Committee of ICISA identified a Project Team, which selected the industry experts in their field as authors and editors for the book. The result of this collaborative effort by the Project Team describes the ‘lifeline’ of the credit insurance product, from the initial application stage to the expiration phase of the policy, including practical use aspects for credit managers.

    This book is not meant to be a comprehensive encyclopaedia of all possible variations in trade credit insurance, but offers compact information on the history of trade, the need for protection against trade credit risks and solutions offered by credit insurance providers.

    The focus is on short term credit, including whole turnover policies and single risk policies.

    The following authors have contributed to the content of the book through essays or by editing chapters. They work(ed) for the companies mentioned, when they wrote their contribution or edited the content. The book was edited by Martin van der Hoek (Coface).

    Miguel Aguirre Coface

    Peter Aitken Atradius

    Felipe Buhigas Mapfre

    Herbert Daniel Zurich

    Martin Da Re Coface

    Doris Egli Scor

    Markus Eugster Catlin Re

    Louis Habib-Deloncle Garant

    Markus Heizmann PartnerRe

    Martin van der Hoek Coface

    Werner Jäger Hannover Re

    Joe Ketzner Euler Hermes

    René Mul Atradius

    Joachim Osinski Atradius

    Rossella Pappalardo Sace BT

    Irmgard Paul Prisma

    Joost van Steen Coface

    Incidental repetition of information occurs in order to maintain the structure of the chapters.

    The ICISA Yearbook may provide the reader with additional information. This companion document may be found on the ICISA website (www.icisa.org).

  • Foreword

  • The International Credit Insurance & Surety Association
  • Book:
    A Guide to Trade Credit Insurance
    Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015, pp vii-viii

  • Summary

    I am very pleased on the occasion of the 85th Anniversary of the International Credit Insurance and Surety Association (ICISA) that it is marked with the presentation of this book, A Guide to Trade Credit Insurance.

    As a technician and manager in the credit insurance industry I very much enjoyed reading this book and I can recommend it to anyone interested in trade credit insurance, as it provides a clear introduction and explanation of the trade credit insurance product.

    I would very much like to congratulate and thank all the authors, editors and reviewers for their hard work in making this book such a success. I would also like to thank Willem Bongaarts and Edward Verhey at the ICISA Secretariat for managing the process on behalf of the Association towards its successful launch. It takes real dedication to make such a project happen and all concerned should be justly proud of this achievement and its readers be appreciative of the excellent result.

    I wish you pleasant reading.

  • Chapter 8 - Buyer risk underwriting in trade credit insurance

  • The International Credit Insurance & Surety Association
  • Book:
    A Guide to Trade Credit Insurance
    Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015, pp 51-74

  • Summary

    One of the important aspects of trade credit insurance is the credit assessment that is duly made in respect of all buyers in an insured's portfolio.

    This credit assessment is used to determine the level of coverage for each of the insured's buyers in case of loss. Furthermore, it is a tool that helps to avoid potential defaults, bearing in mind that the insurer controls the financial and economic situation of each buyer throughout the validity of the policy, duly assessing any new information becoming available and effectively acting as a true credit control department.

    The following is a detailed description of the working methods normally used by insureds in order to manage their risk by means of a credit insurance policy. It also describes the main tasks implemented by risk underwriting teams from an insurer's perspective.

    THE INSURED'S PERSPECTIVE

    Whenever an insured has signed a credit insurance policy, in keeping with the provisions of the policy, he shall provide the insurer with a full list of buyers to whom he sells on credit. The list initially submitted should include the following information:

  • • details of each buyer (company name, VAT number or registered company number, address and country);

  • • amount of the credit limit required for each buyer;

  • • means of payment to be used by each buyer and any securities such as guarantees that may already be in place;

  • • the insured may include any further information or observations they consider convenient for the insurer's risk anlaysis team.

    • On the basis of the information provided, the insurer then establishes credit limits for each buyer and may grant full, partial or no coverage whatsoever in respect of the requested credit limits. In the case of a qualified decision (i.e. involving limitations or exclusions), an insurer will usually indicate the grounds for such decision being made.

    At this point, the full portfolio of buyers will have been duly rated and for as long as the policy is in force, insured may request credit limits for new buyers or apply for modifications of previously established (or formerly excluded) credit limits.

  • Chapter 6 - Premium, the price for cover

  • The International Credit Insurance & Surety Association
  • Book:
    A Guide to Trade Credit Insurance
    Published by:
    Anthem Press
    Published online:
    18 January 2018
    Print publication:
    01 June 2015, pp 41-44

  • Summary

    Before the prospect decides to accept the proposed conditions for cover, negotiations may focus on several aspects of a policy: general provisions, credit limits, specific conditions and, of course, the premium rate. Every insurer has proprietary pricing tools to calculate a premium rate but some of the common pricing building blocks are mentioned in this chapter.

    When a prospect applies for a credit insurance policy, the insurer knows which parameters to take into account for the premium rate he will offer.

    - The subjective risk

    The prospect gives details of its company and trade sector, the usual credit terms agreed upon, credit management procedures, the current outstanding receivables and the losses sustained in the past. The insurer can check the creditworthiness of the prospect and may decide whether to start a business relation or decline to make any offer. When the prospect is a member of a trade sector association and maintains a credit management policy aimed at the prevention of losses, this may be a reason for the insurer to include a premium discount in the calculation of the premium rate.

    - The objective risk

    Details about the portfolio of buyers will determine the premium rate to a great extent. The following elements may play a role:

  • • the volume of turnover;

  • • the spread of risks;

  • • the trade sector of the buyers;

  • • the creditworthiness of the buyers;

  • • the possible inclusion of cover of political risks;

  • • the buyers’ domicile(s) and respective sovereign creditworthiness;

  • • the possible inclusion of the pre-credit risk and the average/ maximum delivery period;

  • • a monthly declaration of whole turnover or of outstanding receivables

  • • the credit term agreed upon with the buyers;

  • • the effective credit term;

  • • the loss history;

  • • the percentage of cover applied for;

  • • the possible inclusion of a bonus/malus arrangement;

  • • the inclusion of deductibles such as a non-qualifying loss, an each and every first loss, a threshold or an aggregate first loss.

Page 189 of 453