Based on this plan, the claims of companies which sell their goods and products or services through installments are insured against the risk of non-collection. All banks, financial and credit institutes and companies which sell by credit plan according to sales contracts, may buy the mentioned insurance to assure collection of claims and guarantee their capital.
What is trade credit and political risk insurance?
Trade credit, political risk insurance or credit insurance is a large sector of trade finance and one that is of increasing demand as conflicts arise worldwide.
Trade credit is the capital that is provided by financiers to their firms purchasing products, so they do not have to pay suppliers from their own balance sheet at the point of purchase. This provides the customer with a longer repayment period, therefore allowing them to free up their cash flow.
Credit risk refers to the risk that the insured will be unable to recover all or part of the receivable due to the occurrence of a cause of loss. This is a key reason behind why trade financing helps with risk mitigation. Credit insurance is the provision of insurance against the non-payment of the customer against an insured occurrence (i.e. contractual disagreements and insolvency).
Similar to credit risk, in the sense that it is also a form of risk that may prevent the payment of a contract, is political risk. In its literal sense, it is the risk associated with political factors and how they may influence and prevent the payment; this can be through political violence, expropriation or currency in-convertibility.
Political risk insurance plays the role as an insurance policy for businesses that are purchasing from potentially in-stable countries. It is becoming more widely adopted as globalization increases and with other risks such as terrorism and war becoming more of a threat. Investment insurance agencies offer this type of protection when a company is engaging in FDI (Foreign Direct Investment); these are often government-funded and coincide with ECAs (Export Credit Agencies) to help promote globalization. With the world becoming inherently riskier, some lenders are now making political risk insurance a mandatory requirement for select countries.