The business of credit insurance
Author: Aaeron ehast
Policies against default rose 14% in 2007, well above any other class. According to industry estimates, for the year 2008 this industry could grow 30%.
The current credit crisis is causing an increase in the number of corporate defaults, given that credit insurance is shown as the great savior. A study of ten Spanish companies is a high risk of default in the next twelve months. And the insurance broker Jori Armengol & Asociados provides for the recruitment of non-payment policies to grow 30% over this year.
Due to the housing crisis, the suppliers of construction (metal, wood, plant and equipment) are the main plaintiff in this type of insurance. The brutal growth in demand for these policies (200% in the first quarter over the same period in 2007) has resulted in these companies are facing raw “three times higher than they would have had to pay in If the contract is signed in advance, in a normal market situation, “said the brokerage Catalan.
The insurance broker Marsh indicated that, currently, half the insurance does not cover construction and real estate credit for fear of defaults. The Director General of Insurance and Pension Funds, Ricardo Lozano, recommends that if so, is not aware that these businesses have difficulty getting credit-coverage, the affected companies filed a complaint with the Directorate General of Insurance.
According to Credit and Surety, the court insolvencies recorded up to March rose 74.2% over the same period in 2007, with 406 new bankruptcy proceedings, many of them in construction, real estate and auxiliary industry (see chart). The insurer, which controls 60% of the market, states that “This and other indicators suggest that we go to an economic scenario with higher rates of default, in which firms demand credit management tools that enable them to identify opportunities for profitable growth.
The increase in unpaid benefits, therefore, insurance firms in this industry because it produces an immediate increase in demand for credit facilities. The other side of the coin is not as positive as higher rates of bankruptcy are an increase in loss ratio (which measures the proportion of premium income that is devoted to the payment of compensation claims).
Therefore, Credit and Surety consider the current scenario and real estate credit crunch “is primarily a challenge” for the sector. “There is no bad time to hire a credit insurance” they add, and remember that the first effect of signing this type of policy is the prevention of default, thanks to a detailed analysis of each business transaction that will close the insured ( see attached information).
Credit insurance was the biggest growth industry that in 2007 around the insurance business, managed to achieve a volume of almost 734 million euros, representing a 14.4% increase over the previous year (see chart). The non-life business rose 5.4%, while the life only grew by 1.3%.
According to industry experts, the Spanish insurance market of credit is the fourth largest by volume, after Germany, France and the United States. Spain also has become the market with greater product penetration among SMEs, over 21%. The firm is the leader of Credit and Surety business, whose policies against defaults protect over 30,000 businesses.
Any company that sells credit can underwrite such insurance. The product has three stages: prevention, compensation and recovery. Prevention means that the insurer’s solvency studying actual companies and may cut ties before they occur and reach bankruptcy defaults.
In case of default, the insurer indemnifies its client. The normal is usually 80% of the debt. Insurer and negotiate payment of delinquent debt. When the case goes through the courts, insurance companies get charged 15% of companies in bankruptcy.
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