What’s int’l credit insurance?

[ad_1]

International credit insurance is a type of insurance policy designed for companies and businesses that carry out financial transactions with customers or other companies located abroad. Most companies have insurance policies protecting their assets domestically, but these typically do not cover cross-border transactions. Internationally focused policies are often designed primarily to protect trade and exports, but broader financial transactions and asset exchanges are also sometimes included. As a general rule, this type of insurance tends to have higher rates than domestic policies, and premiums are usually set after an assessment of the solvency, transactional history and location of the entities involved. War-torn, politically unstable countries or nations often trigger higher rates due to a higher risk of default. International insurance is generally more difficult for the underwriter to formulate because the inherent risks found in countries, currencies and cultures must be carefully evaluated before an international credit insurance policy can be issued. Determining the appropriate level of risk often requires considering all three factors simultaneously.

basic concept

Credit insurance generally covers cases where an entity, usually a company, lends money or makes payments to another with the expectation of some type of compensation, exchange or remuneration. Insurance is generally not necessary for small transactions, but when large sums of money are involved it can do a lot in terms of protecting assets from creditors.

There are several different types of credit insurance, generally tailored to the specific needs of the party or parties taking out the policy. In international settings, policies generally apply to international business transactions. This can be as simple as a business agreement with a foreign subsidiary or as complicated as a new capital investment abroad. International policies are generally administered not by banks but by professional accounting or auditing firms, most of which are accredited by the International Insurance and Credit Guarantee Association (ICISA), headquartered in Switzerland.

Export and Trade Policies

Credit insurance generally covers payment risks resulting from negotiating or exchanging credit sales with buyers. The coverage is called export credit insurance if only exports are insured. The vast majority of policies cover trade in terms of sales, purchases and exports. The specifics of what is covered and at what cost tend to vary based on the specifics of the parties as well as their location, and most often policies are subject to renewal and reassessment periodically – usually annually or semi-annually.

Risks and special considerations

One of the things that makes international credit so unique and so much more complicated is the increased range of things that can go wrong. Most often, policies and premiums are built, at least in part, on the perceived risk of default. In many international settings, default can happen for more than simply the insolvency of a party. Riots, wars, political conflicts and other changes can affect whether or not payment can be expected. Overseas credit insurance policies protect against these types of financial risks.

Some of the most substantial risks are those of increased global competition and nationalistic government policies. Governments tend to demand self-serving policies, such as import tariffs; however, many discourage global trade. Risk assessments are usually performed to factor these factors into the final coverage.

government involvement

At one point, political risk coverage was usually purchased only through specialized government programs. This resulted in the client needing to obtain two separate and distinct international credit insurance policies, which complicated accounting as well as filing and handling claims. Having separate policies for trade and export often requires additional administration and knowledge of the differences in the conditions and requirements set forth by each policy. Today, dual coverage is typically provided by private insurers rather than government agencies, although as with most things, exceptions can be made.

Asset Smart.

[ad_2]