Different types of credit cover
•HEADING A
Offered by a number of underwriters in the UK and on the continent,this policy structure protects against the catastrophe risk.
Sometimes called "Excess of Loss" or "Stop Loss cover",
the underwriting philosophy is centred around the insured's existing in-house credit management controls.
The insured will agree a "first loss" or non-qualifying loss designed to eliminate predictable lower level losses.
Bad debt losses in excess of this level accumulate within a second predetermined band or layer,
referred to as the annual aggregate.
A layer of cover is then purchased in excess of this self-insured proportion.
Cover of up to 100% of each qualifying loss in excess of this agreed annual aggregate is available.
The cover is normally fixed up to an agreed ceiling of annual losses,known as the "maximum liability."
•HEADING B
This is the more traditional credit insurance policy,normally protecting all sales under a single policy.
The policy provides the credit manager with up-to-date financial advice on all principal customers.
Generally the insured will self-insure an element of each credit limit.Normally indemnity is 80%-85%.
At commencement of the policy an assessment is made of turnover likely to be declared under the policy.
The underwriter will agree an annual premium rate charged against such declarations,usually quarterly.
•HEADING C
Some insurers now offer pre-delivery cover as an additional element of whole turnover cover.
Indemnity is the same as normal credit risk and premium is either charged as an additional rate on turnover or is combined in a single charge.
•HEADING D
More companies are now expanding their export business and require a simple,
cost-effective credit insurance policy which does not automatically provide unnecessary political risk cover.
Multi market insurance has been designed to provide cover in a single policy against the risk of non-payment,
due to insolvency or protracted default,in the UK and most OECD markets.
All credit risks are covered with 90% indemnity for both UK and export sales.
Financial advice is also available on major buyers.
•HEADING E
Occasionally one debtor may represent an inordinately large element of a company's turnover.
Although one argument suggests that if the buyer is undoubted,then credit insurance cover is not necessary,
the catastrophic effect of non-payment,due to unforeseeable or uncontrollable events,would invariably suggest otherwise.
Principal customer cover provides protection against non-payment through insolvency of larger buyers.
The benefit of financial advice is available and indemnities vary between 70%-90%.
This type of cover is sometimes referred to as "Datum Line" cover.
•HEADING F
Insures individual target risks or the large single contract.
Premium can be charged as a percentage rate on insured sales,but is more likely to be calculated as a rate on contract value.
Indemnity varies from 75% to 100%,dependent upon the quality of risk.
•HEADING G
Insures the advance payments made to a supplier prior to receipt of goods.
The policy can also be extended to cover consequential loss which may be incurred if the supplier defaults.
Policies are usually underwritten on a single contract basis with premium charged as a fixed amount on contract value.
Indemnity up to 100% is available.
Five-tier rate system controversial
Germany's export credit insurance system came of age on July 1 with the abandonment of a 50-year-old system of uniform premium rates.
A five-tier system was introduced which effectively reduced the former standard premium by two-thirds for cover on deals with lowest-risk countries,
and doubled it for companies doing business with the world's economic laggards.
While the government saw the change as an occasion for celebration,
industry and the opposition remained as resolutely glum as they had through more than two years of consultation.
Certain media commentators were downright aggressive.
One leading newspaper,for example,described the move as an insurance policy for the Bonn government paid for by exporters.
East German politicians complained that because of the heavier premiums for deals with their manufacturers' traditional Russian and other east bloc countries,
export credit insurance would now exclusively benefit west German companies.
Bonn was insistent that the changes should go through.
Germany was behind the times,it said,being the only major exporter to apply uniform tariffs.
It also had international agreements to honour:subsidy rules in the General Agreement on Tariffs and Trade required export credit insurance schemes to be independent and self-supporting.
The old system was increasingly failing to meet these criteria.
At the same time,the Bonn administration was under strict orders from the Bundesbank to cut state spending wherever possible.
Mounting deficits in the state-sponsored Hermes insurance programme,administered by the Allianz group,were a clear target.
The federal budget subsidised the Hermes programme to the tune of a record DM5.1bn last year,
and a further escalation to DM7.5bn(regardless of the impact of the new premiums) has already been earmarked for the current year.
As Gunter Rexrodt,economics minister,pointed out recently,
DM4.5bn of the 1993 Hermes deficit was due to outstanding debts from the former Soviet Union.
While he failed to mention that countries such as Russia and the Ukraine-still important outlets for east Germany's struggling industry-had been placed in the worst risk grade,
he made much of cheaper premiums for other countries where west German exporters are hoping to find new growth.
Singapore,Taiwan and South Korea are now in the top rank-"countries without special risks".
For export credit insurance purposes,they are now on equal terms with large industrialised nations for which the services of Hermes play no role.
Premiums on deals with China and the Czech Republic are reduced by a third.
Mr Rexrodt insisted that higher premiums for Russia and former Soviet Union states offered no disadvantages to German exporters,
since competing nations had long since been paying more for cover there.
While the minister side-stepped the implications for east Germany,
his ministry officials had earlier ridden rough-shod over protests.
At a March meeting in the Baltic state of Mecklenburg-Vorpommern,
regional leaders protested that Hermes operated exclusively on behalf of west German interests.
A Hermes representative was able to demonstrate the charge as untrue with figures which at the same time,
which at the same time starkly illustrated just how important the system was to the region's economy.
While Hermes covered 6 per cent at most of all German exports,the proportion rose to 50 per cent in the former GDR.