Is lack of credit limits additional risk for the Insurer? 23.04.2015

Insurance policy are in large part based on an assessment of the counterparties portfolio by the insurer. It is also choosing which recipient is and in what time it can be insured for a specific amount of credit limits. Although in most insurance policies there is an automatic insurance without the control of the insurer, but frankly speaking the greatest risk is at the large credit limits jackpots. From the point of view of the insurer and the potential amount of compensation paid what is the automatic limit on the level of several thousand zloties compared to a few or a dozen of millions of credit limits. In this case, the bankruptcy of one large company is equal to insolvencies of hundreds of recipients insured in an automatic limit.

In my professional practice, clients often assert that the insurer continuously monitors the financial situation of the recipients, who are given credit limits and thus has control of risk, and may reduce the limits at any time. It’s true, and so the monitoring mechanism of insurers is operated in the vast majority of cases in that way. BUT … firstly financial data available to the insurer reach him with some delay. Secondly the partial data do not always reflect the real situation of the monitored company , because we may be dealing with seasonal industry or even a one-year settlement bonuses from suppliers, which means that the partial financial results that occur during the year are different from the final annual result. Thirdly, sometimes the problems caused to enterprises are unforeseen circumstances or consequences of certain actions, to which neither the insurer nor the suppliers might have had access earlier. It should also be noted that in case of a sudden deterioration in the financial position of the monitored company, the sudden withdrawal of credit limits by the insurer may even aggravate the problems (decreased liquidity by stopping the supply of creditors who lost their credit limits). Imposing obligations on the current economic situation, where in the last few years the number of bankruptcies in Poland is almost twice higher than it was in 2007-20081 seems natural that the insurers are careful in the evaluation of companies, which credit limits are assigned to. This, of course, can cause dissatisfaction among customers who paying for the policy of trading with the insured customers would like to have satisfying credit limits. This is not always possible and sometimes customer may face the dilemma of whether to limit the sale, holding the limits set by the insurer, or take some of the risk on itself. To meet these expectations the insurers offer the so called policy surplus which is filling in missing credit limits, and even granting credit limits to a certain height, for customers, for whom the insurer refused the limit in the main policy. The most frequently, surplus policy is proposed by the same insurer, with whom the main policy is concluded.The insurers prefer to insure the surplus risks that they monitor. But there are also products that may insure missing credit limits from another insurer than the one who the primary insurance contract was concluded with. These interesting solutions are becoming more and more popular, especially among companies with high seasonality of sales, where there is accumulation balances at certain times during the year, or where there is incidental seasonal sales campaigns, also associated with the accumulation of balances in short periods of time.

¹ http://www.coface.pl/Aktualnosci-i-Media/Biuro-prasowe/Coface-opublikowal-raport-nt.-bankructw-w-Polsce-w-2014-r

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