Credit insurance as a tool of counterparty risk management was the topic of our MD’s seminar at the Marcus Evans conference held 21-22 November at Hilton Canary Wharf, London, United Kingdom, to a group of energy sector experts interested in the topic in the current economic climate.
Vlad shared his knowledge gained from many years with various major banks, insurers and insurance broking companies on how to effectively protect against counterparty political and credit risks while optimising costs on sourcing potential insurance protection.
Various examples of different risk transfer structures used by companies and financial institutions were provided to illustrate the concepts in more detail to the commodity and credit risk specialists in the audience.
The audience shared their examples of suffering losses from counterparty defaults and engaged in an active question and answer session. The positive role played by credit insurance in the arsenal of risk management tools was emphasised by all those taking part in trade with other businesses. Often suppliers have no choice or alternative to offering their customers trade credit as an alternative to prepayment or cash against documents terms. This is often necessary as the customer has to generate income from sales of the product or service to pay for it. The supplier is thus exposed to non-payment risk by the buyer.
The risks are elevated in a situation where local laws or customer’s financial standing are not entirely transparent to the supplier. As a result, there is a risk of non-payment that can be mitigated by trade credit insurance which is purchased by energy supplying entities to insure their accounts receivable from loss due to the insolvency of the energy buyers. The product comes in various forms and from a number of credit insurance providers that we work with. It is typically charged on a quarterly or monthly basis and the premium is normally calculated as a percentage of turnover for the period or as a percentage of all outstanding receivables.
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