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11/26 M97/February 2018 Reinsurance

Where a policy includes an excess, deductible, aggregate first loss or minimum retention, the
Underwriter may
offer a ‘discretionary underwriter may offer a ‘discretionary credit limit’ where the insured may include a buyer for cover at a
credit limit’ limit decided on between the underwriter and the insured. This facility depends on the underwriter
examining the procedures used by the insured and being satisfied that such decisions are taken
responsibly. The underwriter may suggest that the business changes or improves its credit control
system.
It is possible to insure debts due from buyers who are not in the same country as the seller and the risks
insured may include insolvency, ‘protracted default’ where payment is not made within a specified time
after due date, failure of the exchange control authorities of the buyer’s country to permit transfer of
currency and inability of the buyer to pay because of government action.
Policies may be rated on turnover with insured buyers during the policy period, or on exposure as
declared at specified times during the policy period. Premium is sometimes stated as a ‘flat’ premium
amount fixed at inception based on the underwriter’s overall assessment of the risk represented by the
trade and the buyers.

Be aware
Trade credit insurance is available to many businesses including wholesale. It is not so appropriate to the retail
sector where the viability of buyers is far more difficult to assess and underwrite.

J1A Types of reinsurance purchased
Trade credit reinsurance can be written as quota share, excess layer or facultative, but the latter usually
refers to cover sought for single buyer policies or where there is one buyer with a particularly large limit
among those insured under a policy. The decision between quota share and excess layer depends on the
policy structure, the risk profile presented and the capital available to the reinsured to support the level
of risk to be assumed.
The reinsurance underwriter will analyse the loss history and also the risk distribution in terms of the
type of buyer expected to be included. Where buyers in countries other than the seller’s country are to be
insured, limits may be placed on the proportion of exposure with specified countries or regions. Reference copy for CII Face to Face Training
Activity
UK Export Finance is the UK’s official export credit agency and provides insurance to UK exporters against
non-payment by their overseas buyers. Visit UKEF’s website at http://bit.ly/1JBJlcA.

Submissions to reinsurers usually contain information about the decision systems employed by the
company and statements about the senior staff deciding underwriting policy and taking high-level
decisions. Rating considerations will include the experience of the senior staff and the systems used as
well as the expectations set out in the budget projections for the profiles of insureds and their buyers.
If any element of political risk is to be included in the cover then that may be subject to loadings, based
on the reinsurer’s view of the risk represented by countries or groups of countries and these will be set
out in the ratings that are applied.
Reinsurers will consider potential country risk, using published information (see, for example,
Reinsurers will
consider potential Transparency International’s Corruption Perceptions Index which annually ranks countries) or, perhaps,
country risk ratings supplied by specialist risk analysis agencies. They will take account of the legal system, the
general commercial morality and the possibility that a country, or a region, may be subject to economic
turmoil or political upheaval.

Useful website
www.transparency.org/news/feature/corruption_perceptions_index_2016

J2 Surety risks

Major contracts, especially government projects, often require the contractor to provide security against
failure to perform; usually this is expressed as a percentage of the contract price. The contractor is often
required to offer financial security that will be paid to the principal in the event that, having placed a
tender and won the contract, the contractor declines to accept it, or sets an unreasonable date for
commencement.
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Chapter