Credit insurance

Under a credit insurance , the insurance is supplier credit understood. However, it does not include loans such as real estate finance or bank loans . These are commonly referred to as residual debt insurance or credit default insurance.

There are different types of credit insurance. The best known is trade credit insurance , which is credit insurance in the narrower sense, since the policyholder is also the beneficiary in the event of damage. Credit insurance in a broader sense, the fidelity insurance and surety insurance .

In trade credit insurance (synonym: del credere insurance or bad debt insurance), the default of receivables for deliveries of goods or services is the subject of insurance protection, which is why the term bad debt insurance has become more and more established in recent years . This is where the lender protects himself.

Derivation of the term

The term credit insurance is derived from the fact that there is a time lag (usually between 30 and 180 days) between the delivery of goods from one company to another or the provision of a service and payment. The supplying company grants a loan until the final payment. According to Euler Hermes Deutschland AG, these so-called supplier credits amount to around 340 billion euros annually in Germany .

Historical background

Every company that supplies goods or provides a service on account should consider the risk of a claim that remains unpaid and, if necessary, secure it. If the acquiring company has liquidity bottlenecks, this can - depending on the amount of the outstanding claim - lead to financial problems and even bankruptcy of the own company. The credit insurance not only takes over the compensation in the event of a loss of receivables , but also checks the creditworthiness of the buying companies at home and abroad.

With Hermes Kreditversicherungsbank Aktiengesellschaft (today: Euler Hermes Germany branch of Euler Hermes SA), an insurance company specializing in this topic was founded in Germany for the first time in 1917 and is now the world market leader in this industry. The objective was to bundle the insurance lines of trade credit insurance, surety insurance and fidelity insurance, which until then had been offered by large insurance companies individually, in order to offer the companies competent protection against liquidity bottlenecks.

In 1923 the Rheinische Garantiebank Kautionsversicherungs-Aktiengesellschaft was founded, which initially specialized exclusively in bond insurance. At the beginning of the 1960s, as part of a change of name to Allgemeine Kreditversicherung Aktiengesellschaft (today Coface AG), trade credit insurance followed.

In 1954 the Gerling Group founded Gerling Speziale (now Atradius), which also specialized in credit insurance.

Forms of credit insurance

A distinction must be made between the following forms of credit insurance:

Trade credit insurance, in which trade accounts receivable are secured
Capital goods credit insurance that covers the economic risk with payment terms longer than six months
Political risks can be covered by the export credit guarantee (Hermes guarantee or Hermes cover) of the Federal Republic of Germany.

functionality

Trade credit insurance contracts usually combine financial and insurance services for the policyholder , i. H. Claim holder. The credit insurer first checks the buyer's creditworthiness . For this he uses a variety of information ( credit agencies , bank references, publications in the Federal Gazette , own information, their own payment experiences, etc.). If this check delivers a positive result, the credit insurer will issue the actuarial cover letter for a certain amount (= "limit"). Revolving up to this limit, the policyholder's open items from deliveries and services are considered insured. The insured event occurs when the customer becomes insolvent or is in default of payment. In the latter case, the supplier usually has to transfer the debt collection to the credit insurer after unsuccessful execution of its own dunning procedure . If this debt collection remains unsuccessful after a previously agreed period has expired, the so-called “Protracted Default” (early insured event) occurs. The amount of compensation in both types of insurance claims is between 70 and 90% of the net claim.

The coverage can also include the so-called “ manufacturing risk ”. If the customer becomes insolvent while the ordered product is still in production, the compensation will be calculated from the preliminary work already performed by the supplier.

In the trade credit insurance contract, the insurer reserves the right to cancel or reduce the insurance cover for individual customers, i. H. cancel or lower the limit. The supplier then only has reduced or no insurance coverage for future deliveries and services to his customer. The decisive factor for such measures is the assessment of the customer's creditworthiness by the trade credit insurer itself. If, from its perspective, the probability of the occurrence of the insured event increases, it withdraws the insurance cover.

Bonuses and Fees

Depending on the nature of the services, there is an insurance premium for the insurance service as well as various fees for the financial services.

The insurance premium is calculated either on the insured turnover (sales premium) or on the insured open items (balance premium). The sales premium includes a flat-rate discount for deliveries / services that are not covered and can usually be precisely quantified and calculated for an insurance year in advance. The balance premium ensures that an insurance premium is only paid for claims that are actually insured. However, this requires a monthly determination of these open items. Due to fluctuations in the open items and their coverage by the credit insurer, the amount of the premium cannot be precisely determined in advance of an insurance year.

The premium is calculated in per mille of sales / open items. In addition to the economic situation, financial strength of the credit insurer, etc., company-specific factors are also included in the calculation of the premium rate, e. B .:

average incoming payments
own branch
Customer branch
Export share
own accounts receivable management , e.g. B. dunning cycle, due dates, invoicing period
Bad debts in the past.

The premium rate is usually between 1.0 and 3.0 per thousand.

In the trade credit insurance contract, fees for the following financial services are usually charged:

Credit check (between 5 and 75 euros per insured customer)
Debt collection (order fee, flat-rate service fees, success fees, etc.).

Outsourced services

Sale of receivables: Insured trade receivables typically form the basis for reselling the receivable by way of forfaiting or factoring, but also for securitizing receivables in the form of asset-backed securities . The compensation claims from a WKV are assigned to the buyer of the receivables .

Top-up coverage: In the event of an incomplete cover commitment (partial acceptance) by a credit insurer, the market sometimes offers so-called “top-up cover”, which increases the limit of the credit insurer and thus takes on part of the default risk.

Special case: State export guarantee

For deliveries to markets in which the political risk outweighs the economic risk, private credit insurers usually only provide limited coverage or no coverage at all. Here, the state export subsidy usually offers instruments to secure the claims. These follow the same system (combination of credit checks, cover transfer, debt collection). In Germany, this is the Hermes cover . These can also be linked to financing instruments such as forfaiting and factoring .

Associated forms of insurance

Consumer credit insurance is also part of the wider credit insurance environment , although it is aimed exclusively at credit institutions, for example to secure overdrafts or installment loans from private individuals. It is important in times of increasing unemployment, as the increasing number of judicial decisions shows. The deposit insurance, which works in a similar way to a bank guarantee or bank guarantee , should also be placed in this extended environment . In economic terms , the travel guarantee certificate is also a credit insurance in connection with package tours .

Partly that is still fidelity insurance called, can, however, probably only derive from the fact their membership in the credit insurance that this product is usually offered by the credit insurance companies.

Current changes and discussion

Relation of insurance premiums / assumed liability volume

These key data are roughly in the ratio 1: 350 for the insurers: ie guaranteed cover volume of 350 billion euros is offset by an insurance premium received of 1 billion euros. The credit insurers only have the policyholders pay a fraction of their obligations - this is not only due to the undercutting competition between the providers for the cheapest premiums. The reinsurance of part of the assumed liability does not change anything. The following scenario shows the fragility of the system: If only 40% of the cover volume taken over is actually used by current transactions and there is only a risk of insurance claims with an accumulated volume of one percent of the cover volume actually used, the credit insurer must use part of its equity to settle the claims . The protection of equity forces the credit insurer to be extremely sensitive to the economy.

Rationalization processes at the trade credit insurers

Credit insurers excel in their risk departments every day thousands of credit decisions . For that always computerized in recent years, standardized procedures in the areas of credit rating and credit decision (credit rating and the award of cover notes) analogously the banking distinction between market and back office introduced. There is a tendency for individual credit decisions to be replaced by algorithms (e.g. fuzzy logic ). In their commercial departments, all three major credit insurers implement uniform, cross-border contract standards and substitute individual contract management with online contract handling and telephone service hotlines. Risk and contract data are automatically available in this form and quickly accessible resources for decisions by the top management of the credit insurer. The result is usually a blanket, massive downgrading of insurance coverage for companies in a certain credit rating, region or industry. In contrast to the rating downgrades by rating institutes, which are each a matter of the creditworthiness of an individual debtor, a credit insurer can always implement the simultaneous devaluation of a large number of companies and thus a huge volume of receivables “at the push of a button”. In terms of their real economic effect, such risk minimization measures are quite comparable with the rapid devaluation of financial derivatives such as collateralized debt / loan obligations ( Warren Buffett : "weapons of mass destruction").

Behavior of trade credit insurers in current economic and industry crises

The financial and economic crisis of 2008/09 hit the commercial credit insurers in the midst of their rationalization processes. In addition, the automotive industry was the first to be affected by an increased risk of insolvency that was well organized and politically well connected. This meant that the credit insurers, who otherwise tend to act in the background, had to justify themselves in the business press for the “massive disruption of supply chains”. In view of the fragile relationship between insurance premiums and the assumed liability volume, it is suspected that credit insurers tend to dramatize risks from economic downturns rather than assess them realistically. As the automotive industry recovered faster than expected in 2010, this discussion soon subsided. However, nothing has changed in the undifferentiated and generalized approach of credit insurers, as recently demonstrated by downgrading and coverage cuts across the board for companies based in Greece or companies in the European solar industry.