1. Presented to NACM Gateway Region by Mark Regenhardt September 18, 2007
Credit Insurance: Valuable Tool for Domestic & International Credit Management
Presented to
NACM Gateway Region by
Mark Regenhardt
September 18, 2007
Political Risk, Credit Insurance, and Trade Finance Solutions

2. Agenda Recent Industry Trends Types of Credit Insurance
Distribution Channels
Sample Policy Structures
Claims Process & Recoveries
Cost Benefit Analysis
Open Account Customer Financing
Medium-term Insurance & Political Risk
Q & A
Political Risk, Credit Insurance, and Trade Finance Solutions

3. Recent Industry Trends
Very soft market
Concern over tightening in credit
High demand in certain industries
Low claims
Several new players
Consolidation Over
Insurers selling information
Select risk is possible
Growth in global policies
Political Risk, Credit Insurance, and Trade Finance Solutions

4. What Does Credit Insurance Cover?
Non-payment of trade obligations for political or
commercial reasons:
Political Risks (foreign transactions):
Government acts/political events that restrict payment
Currency inconvertibility (aka, transfer risk)
War, riot, insurrection or civil disorder
Embargo
Terrorism
Commercial Risks (foreign and domestic)
Commercial bankruptcy or legally protected reorganization
Protracted default (aka, slow pay)
Exclusions include disputes
Political Risk, Credit Insurance, and Trade Finance Solutions

5. Why Use Credit Insurance?
Risk mitigation
Increase sales via open account
Facilitate financing or sale of A/R
Access insurers information/database
Reduce collection expenses
Standardize credit decision process
Political Risk, Credit Insurance, and Trade Finance Solutions

6. Credit Alternatives Vs. Risk
CUSTOMER
DESIRE
REPAYMENT
RISK
High
High
Insured
O/A
Low
Low
CIA Letter of Credit Documentary Collection Open Account
Political Risk, Credit Insurance, and Trade Finance Solutions

7. Types of Credit Insurance
Short-Term Credit Insurance
Export & domestic coverage covering non-payment of A/R
Single and multi-buyer programs
Supports up to one year repayment terms
Medium-Term Credit Insurance
Facilitates LIBOR-based equipment and project financing for foreign obligors
Supports up to 1 to 5 year repayment terms
Political Risk, Credit Insurance, and Trade Finance Solutions

8. North America: Short-term Credit Insurers
Political Risk, Credit Insurance, and Trade Finance Solutions

9. North America: Medium-term Credit Insurers
Political Risk, Credit Insurance, and Trade Finance Solutions

10. Credit Insurance Distribution Channels
Captive Sales Agents (Euler, Atradius & Coface)
Generalist Brokers
Specialist Brokers
Political Risk, Credit Insurance, and Trade Finance Solutions

11. Credit Insurance Policy Types
Single Buyer (Export and Domestic)
Short Term: Supports up to 1 year repayment terms
Medium Term: 1 to 5 year terms
Long Term: 5 to 7 years
Banks or corporations can be the insured (policy holder)
Multi-Buyer (Export and Domestic)
Whole-Turnover
Key Account (ex. Top 20 Buyers)
Select Risk (ex. Latin America Only)
Usually short-term cover but medium-term multi-buyer cover is possible
Political Risk, Credit Insurance, and Trade Finance Solutions

12. Multi-Buyer Credit Insurance Styles of Underwriting
Excess-of-Loss
Policies with deductibles and discretionary authority
Insured continues to make own credit decisions for most buyers
American Style Underwriting
Insurers include AIG, FCIA, Ex-Im Bank, HCC, QBE, ACE
Ground-Up:
Policies with low or zero deductibles and low or zero discretionary authority
Insurance company makes most or all credit decisions
European Style Underwriting
Insurers include Atradius, Coface, and Euler
Political Risk, Credit Insurance, and Trade Finance Solutions

13. Common Credit Insurance Parameters
Policy Limit of Liability
Deductible
Indemnity (inverse of co-insurance)
Premium Rates (Sales or Limits Based)
Minimum Premium
Credit Limits
Non-Qualifying Loss
Political Risk, Credit Insurance, and Trade Finance Solutions

14. Short-term Multi-buyer Key Account Policy
Limit of Liability (LOL): $30,000,000
Indemnity: 90%
Deductible: None
Largest Buyer Limit: $30,000,000
Transaction Tenors: 30 – 120 days O/A
Insurers: Two – Syndicated 50/50
Waiting Period: 90 days
Countries: Peru, Mexico, Italy, U.S. & Canada
No. of Buyers: 10
Premium rate: $0.065 per $100
Also mention syndication capability
Political Risk, Credit Insurance, and Trade Finance Solutions

15. Short-term Single-buyer Policy
Limit of Liability (LOL): $30,000,000
Indemnity: 80%
Deductible: None
Transaction Tenors: 120 – 240 days O/A
Insurers: One
Waiting Period: 90 days
Country: Various
Premium rate: None, Flat $300,000
Collection Fees: None
Also mention syndication capability
Political Risk, Credit Insurance, and Trade Finance Solutions

16. Typical Credit Insurance Policy
Insurer
Reports &
Premium
Claim
Payment
Broker
Credit Insurance Policy
HQ, St. Louis, MO
Additional
Insured, TX
Additional
Insured, KS
Additional
Insured, IL
Political Risk, Credit Insurance, and Trade Finance Solutions

17. Global Credit Insurance Policy
Insurer
U.S.A.
Reports &
Premium
Claim
Payment
Broker
U.S.A.
Master Policy
HQ St. Louis, MO
Locally
Sub-Policy
Mexico
Locally
Sub-Policy
Brazil
Broker
Mexico
Broker
Brazil
Insurer
Brazil
Insurer
Mexico
Political Risk, Credit Insurance, and Trade Finance Solutions

18. Benefits of Global Policy (Global Negotiation- with Local Service)
Global & Centralized Policy Negotiation
Local Language Service & Support
Compliance with Local Insurance laws (which differ by country)
Premiums Are Fully Tax Deductible
Claim Payments Match Country of Loss
Political Risk, Credit Insurance, and Trade Finance Solutions

19. Policy Administration
Sales reporting & premium payment
Qualifying customers for insured lines of credit
Past due reporting
Cease-shipment or automatic withdrawal of cover provisions
Rescheduling of debt must be pre-approved
Claim deadlines and “satisfactory” filing of claim form and supporting documents
Political Risk, Credit Insurance, and Trade Finance Solutions

20. Syndicated Policy Multiple Insurers - one policy
Increasing in popularity
Can be for one or multiple buyers
Insurers agree to pricing and other policy terms
Leverages global insurance capacity
Insurer
No. 1
$10 Mil.
Buyer
Limit
Insurer
No. 2
$10 Mil.
Buyer
Limit
Insurer
No. 3
$10 Mil.
Buyer
Limit
$30 Mil.
Total
Buyer
Limit
Political Risk, Credit Insurance, and Trade Finance Solutions

21. Top-up Policy Two or more policies Can be for one or multiple buyers
Common with existing policies
Price varies by layer
Layer 2 lower priced than Layer 1
Excess
Insurer Policy 2
$15 Mil.
$30 Mil.
Total
Buyer
Limit
Primary
Insurer Policy 1
$15 Mil.
Political Risk, Credit Insurance, and Trade Finance Solutions

22. Claim Payment Flow Chart
Days
Past Due
30 Days
30 – 60 Days
Invoice
Period
Waiting
Period
Claim
Processing
Period
Claim
Payment
Collection Expense
Paid by Insurer
** Collection Effort
Responsibility of Insured
Collection Expenses
Avoided by Insured
** Some Insurers
Indemnify this expense
Political Risk, Credit Insurance, and Trade Finance Solutions

23. Sample Claim Payout Claim Payout $750,000 x 90% = $675,000 Recovery
$1,000,000
Bad Debt
$1,000,000
Total
Claim
Claim Payout
$750,000
x 90% =
$675,000
$750,000
Insured
Limit
Recovery
Sharing %
$675,000/$1,000,000 =
67.5% Insurer, 32.5% Insured
$1,000,000
Total
Claim
$675,000
Claim
Payment
Political Risk, Credit Insurance, and Trade Finance Solutions

24. Recovery Scenario (After Claim Payment)
$100K
Recovered
From Debtor
$85K
Net
Recovery
15% Insurer
Collection
Expense
$1,000K
Total
Claim
Recovery
Sharing %
Insurer $85K X .675 = $57.3K
Insured $85K X .325 = $27.7K
$27K Recovery
$675K
Claim
Payment
Political Risk, Credit Insurance, and Trade Finance Solutions

25. Top Reasons for Claim Denial
Unresolved disputes
Failure to meet credit limit requirements
Non-payment of premium
Past-due reports not filed
Shipments made when customer had excessive past dues
Late claim filing
Unauthorized debt restructuring
Key required documents missing
Documents not properly executed
Political Risk, Credit Insurance, and Trade Finance Solutions

26. Cost Benefit Analysis Assumptions: Insured sales: $30,000,000
Gross margin: %
50%/50% domestic/export
Premium rate: $0.20 per $100
Estimated premium: $60,000
Largest credit limit: $3,000,000
Average credit limit: $250,000
Political Risk, Credit Insurance, and Trade Finance Solutions

27. Cost Benefit Analysis Incremental Sales Needed to Pay for Policy:
Incremental Credit Limit Needed to Pay for Policy:
$300,000/6 = $50,000 (60 days O/A)
Incremental Sales Needed to Pay for Largest Loss:
$3,000,000/.20 = $15,000,000 or 50% !
Political Risk, Credit Insurance, and Trade Finance Solutions

28. Profit & Loss Impact (‘000) No Ins. Insured Revenue: $30,000 $30,000
Less Bad Debt: $3, $300
Less Insurance: $60
Net Profit: $3, $5,640
Savings $2,640 / $60 = 44 Year Payback Return
Political Risk, Credit Insurance, and Trade Finance Solutions

29. Open Account Trade Finance Program
Insurance + Bank A/R purchase program = open account trade finance program
Reduces cash flow burdens of the customer
Credit insurance protects the balance sheet as sales and A/R exposure grows
DSO rises, so exporter sells the insured foreign A/R to bank monthly or bi-monthly
Pass bank finance and insurance costs to customer, perhaps even adds a small margin for especially long terms
Political Risk, Credit Insurance, and Trade Finance Solutions

30. Sample Bank Term Sheet for A/R Purchase Facility
Recent term sheet from a large commercial bank for a $15 million
foreign receivable purchase facility. Terms included:
Credit insurance required with assignment of proceeds to bank
Supported invoiced terms of up to 180 days
A/R sale/purchase could be made weekly or bi-weekly with a $500,000 minimum purchase per transaction
Bank purchases title to invoices and pays 90% (the amount of insurance indemnity) of the face value of invoices less the bank's "Discount Margin“
The bank's "Discount Margin" was LIBOR % per annum, calculated on the basis of 90% of the face value of each invoice purchased
Seller retains "First Loss Deficiency Guarantee" of $150,000 to match the credit insurance policy deductible
One-time structuring fee: $25,000
Political Risk, Credit Insurance, and Trade Finance Solutions

31. General Structure (Relative to Previous Sample Bank Term Sheet)
Credit insurance policy issued to exporter
Insurance attaches when shipment is made or service rendered
Bank that purchases insured A/R is assigned as Loss Payee
Claim payments made to bank
Exporter/insured must retain policy risk retention
Bank has recourse back to exporter for uninsured amounts (deductible, co-insurance, or non-compliant A/R)
Exporter responsible for administration of insurance policy
A/R Collection
Bank buys A/R and hires exporter back as the servicing agent on what is now the bank’s asset, or
Bank services/collects the A/R on its own
Political Risk, Credit Insurance, and Trade Finance Solutions

32. Supplier Credit Receivable Finance Program (Insurance Backed)
Insurer
3. Assignment of Insurance Policy Proceeds
Bank
2. Receivable
Purchase
Agreement
Insured/
Seller
1. Credit
Insurance
Policy
5. Receivable Purchase
4. Invoice
6. Payment
Customer
Political Risk, Credit Insurance, and Trade Finance Solutions

33. Alternative Structure: Bank as the Insured
Credit insurance policy issued to bank
May be of greater interest to bank for purchases of Largest Accounts A/R (such as Top 10 customers)
Coverage attaches once bank purchases the A/R from exporter
Claims filed by the bank
Bank must retain policy risk retention
Bank generally cannot have recourse back to exporter (A/R seller) for uninsured amounts (deductible, co-insurance, or A/R out of compliance)
Bank responsible for administration of insurance policy
Bank must collect all necessary documentation from A/R seller/exporter to ensure it can file a complete and satisfactory claim
A/R Collection
Bank buys A/R and hires exporter back to be servicing agent on what is now the bank’s asset, or
Bank services/collects the A/R on its own
Political Risk, Credit Insurance, and Trade Finance Solutions

34. Buyer Credit Finance Program
Bank/
Insured
Insurer
1. Credit Insurance Policy
4. Receivable Purchase
Seller
2. Loan Agreement
3. Invoice
5. Payment
Customer
Political Risk, Credit Insurance, and Trade Finance Solutions

35. Medium-Term Credit Insurance
“Medium-Term” defined as transactions with repayment terms greater than one year
Available for capital equipment or project financing transactions
Supports LIBOR-based loans by a U.S.A. bank to overseas buyers
Maximum terms to dealers is 2 years
Maximum terms to end-users is up to 5 years (depending on transaction size)
Semi-annual payments of principal + interest
Transaction backed by comprehensive (political & commercial) credit insurance
Political Risk, Credit Insurance, and Trade Finance Solutions

36. Ex-Im Bank MT Basics
Coverage carries full faith & credit of U.S. government
Limited coverage for foreign content
15% minimum down payment required
100% indemnity on amount financed
Equal semi-annual payments of principal + interest
Flat rate premium based on country, payment terms, disbursement period, and financial strength of obligor
Buyer or supplier credit structure
Standard documentation used for obligors in any country
Political Risk, Credit Insurance, and Trade Finance Solutions

37. Private Sector MT Basics
Unlike Ex-Im Bank, private insurers typically structure coverage with 90% indemnity
Typically an alternative when foreign content precludes Ex-Im Bank coverage
No down-payment requirements
Underwriting criteria less stringent and application process less cumbersome than Ex-Im Bank, and turn-around times are much faster in the private market
Bank funds the MT notes but will need recourse back to exporter for the uninsured portions in the event of a default
Private insurers require exporter to develop legally enforceable promissory note and other documentation
Political Risk, Credit Insurance, and Trade Finance Solutions

38. Private Insurers Maximum Terms
Insurer Maximum Terms
AIG years
FCIA years
EIC years
Atradius years
Coface years
HCC years
Zurich years
Political Risk, Credit Insurance, and Trade Finance Solutions

39. Why Use Political-Risk Insurance?
Protect overseas assets against Confiscation,
Expropriation, Nationalization (CEN) and Political
Violence (PV)
Obtain Currency Inconvertibility (CI) cover to
protect profit repatriation from foreign
operations
Protect against wrongful-calling of guarantees
Cover trade transactions with sovereign obligors
Protect against Contract Repudiation or Non-
Delivery
Political Risk, Credit Insurance, and Trade Finance Solutions

40. Thank You Mark Regenhardt International Risk Consultants, Inc.
212 Crystal Street
Suite B
Cary, IL 60013
Tel
Fax
Cell
Web:
Political Risk, Credit Insurance, and Trade Finance Solutions