Pay-As-You-Go vs Non-Cancellable Credit Insurance Policies
By T. John Keevan-Lynch
Most export credit insurance policies written in the US require the insured to pay at least 80% of the annual premium on projected export sales in advance, or with interest over the course of the year, regardless of whether the projected exports materialize. However, at least two US insurers offer pay-as-you-go export credit insurance policies under which the insured is obliged to pay premium only on shipments effected in the previous month.
So, why would an insured opt to pay in advance for shipments that may or may not take place nine months in the future?
Part of the answer lies in the history of the most recent financial crisis in this country. At the outset of the Great Recession, a couple oflarge export credit insurers cancelled or lowered their previously-approved overseas buyer credit limits for policies that had already been issued and paid for.
These insurers were able to do so because their policies were cancellable, i.e., they allowed the insurers to reduce or cancel a credit limit at any given time and for any reason. Only credit insured shipments made prior to the withdrawal of cover remained insured. The insurers that cancelled or drew down buyer limits were reacting not only to particular buyer or country risk, but to sudden insecurity in all financial transactions.
Afterwards, exporters wanted non-cancellable policies whose terms and conditions could not be changed by an insurer during the policy term. In effect, non-cancellable policies give the insured a “reservation of capacity” that cannot be given to another insured or re-priced at a higher premium rate if and when the risk of non-payment rises for industry-wide or country-specific reasons.
Still, like cancellable policies, non-cancellable policies do not cover shipments made under specified high-risk conditions that become more prevalent in times of economic recession or political upheaval. Both policies preclude shipping to a buyer who is seriously past due on existing invoices, has ceased normal operations or has become the subject of insolvency proceedings. Both require that the insured use measures to prevent and minimize loss.
While all non-cancellable credit insurance policies demand payment of premium for projected exports, not all cancellable policies allow pay-as-you-go premium payments. In fact, most do not.
Bottom line, in deciding whether to accept a policy that requires payment of premium on the basis of projected exports that may never materialize, an insured should not only consider (1) the
policy’s cancellable or non-cancellable language but also (2) the insured’s duties as described in the policy, as well as (3) the character of the insurer, changeable as that may be, because they all exercise a degree of business judgment in deciding whether to cancel coverage or deny a claim.
Copyright© 2015 by Provident Traders, Inc.