This is why trade operators who had historically sought insurance protection against their ‘political’ risks also started seeking protection against commercial payment default by private buyers. The insurance market thus started to combine these political and commercial cover in the mid-1990s, and thus the term ‘single risk’ insurance was coined by most of the insurance providers.

A FEW WORDS ABOUT TERMINOLOGY

Why ‘single risk’ and what does it mean?

The ‘single risk’ concept has been developed as a way to differentiate from the short term whole turnover (or portfolio) business that historically represented the bulk of activity of the credit insurance market. The diversity of international trade flows calls for such a differentiation.

On the one hand, sales of consumption goods occur by way of numerous regular deliveries to a large variety of buyers within the same country or throughout many countries. There is no specific commercial contract between the seller and the buyer for each and every delivery but rather trade is usually conducted pursuant to purchase orders sent by the buyer to the insured. Payment terms are agreed between the parties, generally on relatively short credit terms (ranging from cashon- delivery up to one year credit). Short term whole turnover (or portfolio) insurance has been designed to cater to these trade flows specifically. On the other hand, sales of capital equipment or building/ infrastructure construction or commodity trading are operated in a different way, frequently with commercial contracts written on a caseby- case basis, and exhibiting longer payment terms (tenors), and bank financing or other securities or collateral.

The process of insuring accounts receivable involves understanding a company's trade sector, risk philosophy, business strategy, financial health, funding requirements and internal credit management expertise. The ultimate goal is not only indemnify losses incurred from a trade debt default but also to help the insured avoid catastrophic losses and grow their business profitably. The key is having the right information to make informed credit decisions and therefore avoid or minimize losses.

A trade credit insurance policy does not replace a company's credit practices, but rather supplements and enhances the job of a credit professional. The best credit insurers will invest heavily in the development of proprietary credit and financial information, and also will employ risk analysts, as well as industry- and countrybased underwriters, in many geographic locations in order to have a close physical presence to its customers’ buyers. The better credit insurers will also analyse payment information about the insured buyers to identify early signs of financial trouble.

At the start of negotiations the would-be insured describes the risk structure of the business it wants to insure in a document known as the application form. This contains all the details on the insured's own business and about its buyers that are required for assessing the risk profile. The details on the insured itself serve not only to categorise the company in terms of sector, products, market standing etc. but also assess the subjective risk, aspects such as professionalism, management quality and mentality and solvency. The other side of the story is the risk profile of the buyer portfolio. To assess these details are needed on the potential buyers, such as their names, locations/domiciles, numbers, size, turnovers and outstanding receivables, terms of payment and payment periods, payment history, defaults, etc.

Today, the term ‘trade’ is used for transactions that involve multiple parties participating in the voluntary negotiation and exchange of one's goods and services for desired goods and services of another party. The advent of money as a medium of exchange has allowed trade to be conducted in a manner that is much simpler and effective compared to earlier forms of trade, such as bartering, which is the act of trading goods and services between two or more parties without the use of money.

Trade has evolved considerably over time; however, the basic elements of buying and selling in some form of a market have not changed, because ultimately, trade still involves transferring the ownership of goods from one person or entity to another.

ABSOLUTE AND COMPARATIVE ADVANTAGE

One of the major benefits of trade was described by Adam Smith in ‘An Inquiry into the Nature and Causes of the Wealth of Nations’. First published in 1776, this theory states that free market economies are more productive and beneficial to their societies and that nations can only benefit from one another if free trade is practised. The main argument here is that a country can produce goods or services at a lower cost per unit than the cost at which another country produces that good or service.

Later in 1817, David Ricardo described in his publication ‘On the Principles of Political Economy and Taxation’ how two countries, or any kind of different parties, can both benefit from trade if, in the absence of trade, they have different relative costs for producing the same goods. David Ricardo illustrated the importance of comparative advantage in an example involving the trade of cloth and wine between England and Portugal in order to describe how productivity levels dictate the patterns of trade.