Category: Insight | Date: 09/01/2018

Glossary

Your Credit Insurance Glossary

Administration

Accountants are installed to sell the business as a going concern. This usually means liabilities are left behind and the assets of the business are sold. Creditors invariably lose out under these circumstances.

Advance Payment Guarantee
Provides protection where you make payment prior to receiving the goods / services.

Adverse Information
An insurance term that means events or circumstances that have led or may lead to deterioration in the financial situation or credit worthiness of a buyer or a country of a buyer.

Aggregate First Loss (AFL, Policy Deductible)
This is a policy excess where an aggregate of claims made in the policy year has to be breached before the Insurer starts to pay claims. Sometimes referred to as catastrophe cover as the policyholder has to bear a significant loss before claims are settled.

Assignee (Loss Payee)
A third party to whom (by authorisation of the Insured) the legal rights to a claim payment only under a policy is transferred. The assignee hold no other rights under the policy as it is not entitled to share policy information such as a Joint Insured might.

Bankruptcy
This is the only terms applicable to a person’s insolvency. New rules in 2007 allow individuals to be protected from their creditors and can return to a “normal” status after a period of two years. The process is triggered by a High Court order following a petition by a creditor who is owed at least £750. The official receiver (OR) normally handles bankruptcies. A bankruptee must not obtain credit of more than £500 from any person, without disclosing the fact that they are Bankrupt.

Bonding / Bonds
The activity of providing guarantees that protects the beneficiary if the supplier fails to meet the agreed performance level. Bonding is also known as surety insurance.

Bound / Binding Contract or Order
A contract of sale where you are able to demonstrate that there would be penalty or prejudice to you if you did not fulfil your contractual obligations. To merely have offer and acceptance is not the essence of a bound or binding contract.

Broker
An intermediary whom an application for insurance is presented from prospective insured to the insurer.

Buyer
Your customer with whom you trade with and is the subject of a Credit Limit endorsement to your policy.

Claim (Notice Of Claim)
A formal written application by the insured for indemnification of a valid cause of loss under the policy. This is usually done on dedicated documents provided by the insurer.

Credit Insurance
Commercial and / or political risk insurance whereby the customer is protected against non-payment of trade receivables due to insolvency or default and insured perils as applicable.

Credit Limit
The amount of insured cover the Insured has on a particular buyer evidenced as a written endorsement to the policy.

Credit Limit Notification
A written notice of a Credit Limit which is endorsed to the policy.

Credit Underwriting (Limit Underwriting)
Assessment by the Credit Insurer by analysis of the financial condition of buyers, before setting a credit limit.

Commercial Performance Guarantee
Provides a solution to support legitimate financial transactions, other than the raising of capital, subject to suitable collateral support.

Datum Line
A qualifying ledger balance sum below which buyers are not included in the insurance policy until this value is breached. Some underwriters refer to it as a Flex policy.

Declaration of Turnover (Shipment Report, Insured Transactions Report)
An insurance process where the insured sales to the buyers (customers) of the policyholder are revealed, normally on a dedicated form, to the Insurer to determine the final policy premium for the relevant policy year.

Deductable (Also known as First Loss or Excess)
The amount of loss that must be absorbed by the insured for their own account before indemnification under the policy. This is an insurance principle where the loss is therefore shared and retained as an interest for by both parties.

Deferred Consideration Bond
Allows you to import goods and delay payment of the duty for an extended period, to relieve pressure on your cash flow.

Deposit Premium
(Instalments of) premium paid in advance, to be adjusted on receipt of the declaration of turnover or outstanding balances.

Discretionary Limit (DL, Discretionary Credit Limit, DCL, Non-Vetting Limit)
The amount up to which, according to given guidelines, the insured may set a credit limit without specific review by the insurer.

Each and Every First Loss
A type of first loss or excess to be deducted from each claim payment and to be kept for the account of the Insured.

Eigentumsvorbehalt
Relates to German law concerning retention of title. It is different to UK rules in that when the creditor registers their claim in the insolvent estate they will only be entitled to potential dividends shared with other creditors. Not registering in time precludes any benefit and cannot be amended later.

Extension of Due Date (Due Date Extension, Deferral of Payment)
Granting of a credit term longer than agreed upon in the original sales contract.

Extension Period (Maximum Extension Period)
The theoretical period allowed by the Insurer, after the original invoice due date, for the policyholder to collect the credit debt before further action has to be taken under the policy.

Endorsement
An addendum or enhancement to the policy conditions.

Exposure
Total amount underwritten by the Insurer as cover on a buyer, a country or under a policy or all policies.

Factoring
Releases cash tied up in outstanding customer invoices, bridging the cash flow gap between raising an invoice and getting paid. This facility can provide an advance up to 85% against unpaid invoices. The Client’s debtor pays the Factor directly. Both the Factor or the Client can chase for payment.

First Loss Threshold (Non Qualifying Loss for AFL Policies)
The amount below which losses do not qualify for indemnification and are to be kept by the insured for their own account.

Goods Delivered
Goods supplied under a contract of sale between the Policyholder and the Buyer.

Holding Company
A parent company that will invariably be the vehicle that issues guarantees for its subsidiaries.

Import/Export Finance
Funding advanced against confirmed orders up to 85% against overseas unpaid invoices. The funder will chase the invoice.

Indemnification
The level of cover that an insurance policy will settle claims subject to compliance on all terms and conditions.

Insolvency
A judicial or administrative procedure whereby the assets and affairs of the buyer are made subject to control or supervision by the court or a person or body appointed by the court or by law, for the purpose of reorganisation or liquidation of the buyer or of the rescheduling, settlement or suspension of payment of its debts.

Insolvency Types:
There are different types of Insolvency, and for the people who administer them:

  • Debenture holders will put a company into Administration or Receivership to recover their charges
  • Where there are no funds, Liquidation applies and through the Official Receiver if there are insufficient funds to pay fees
  • For individuals (Sole Traders and Partnerships) the route is Bankruptcy
  • Raw materials
  • Direct labour costs
  • Preparation of goods prior to the physical manufacturing process
  • Purchase of goods by the Policyholder for onward sale to the Buyer
  • Work in Progress costs incurred in manufacturing
  • Stock awaiting delivery
  • Pre-paid delivery costs

Insurer

The party offering insurance policies for premiums, also known as an underwriter.

Insured Debt
The amount owed to the policyholder by the Buyer but not more than the Insured Loss as defined by the approved policy credit limit.

Irrevocable (Documentary) Letter Of Credit
Unalterable obligation of a bank authorising a person or company to draw money up to a specified amount, usually via a third party bank, subject to documentary compliance.

Joint Insured (Additional Named Insured, Co-Insured)
A party, which together with the Lead Insured, purchases the insurance policy and assumes specified responsibilities and obligations under the policy. The relevant turnover of each entity is co-insured under the single policy document. If the Lead Insured fails the Joint Insureds can benefit from the policy provided all charges and costs are met.

Limit Endorsement
Written evidence of an approved credit limit which forms part of the policy.

Limited Liability Company
Limited companies exist in their own right. This means the company’s finances are separate from the personal finances of their owners. Shareholders may be individuals or other companies. They are not responsible for the company’s debts unless they have given guarantees – for example, a bank loan. However, they may lose the money they have invested in the company if it fails.

Liquidation – Insolvency Practitioner
The business is wound up, maximising asset realisation to pay the Liquidator’s fees. Any surplus is put into the estate. Unsecured creditors claims are assessed and admitted to rank in the estate, to share out any final value, by dividend share. Payouts are rarely above single figures in percentage terms.

Liquidation – Official Receiver (OR)
Where there are no surpluses, the Government Agency is used to wind up a business. Dividends are not available through this path and the OR will only acknowledge receipt of a claim in the estate. They will not comment on it’s value.

Losses Occurring Policy
A policy under which cover is conditional on the date of the cause of loss occurring within the policy period. Essentially cover is provided for deliveries or despatches made in the policy period. There is no pre-policy cover but there is a run-off liability at the end of the policy.

Losses Arising Policy
A policy under which cover is conditional on the date of the cause of loss arising within the policy period. Cover is provided for insolvencies only during the policy period. This means that there could be pre-policy debt which is covered, on existing contracts but the liability shuts off immediately on policy termination.

Maximum Liability (Policy Limit, Aggregate Limit, Insurer’s Maximum Liability, Maximum Sum Insured)
The maximum amount that the insurer is liable to pay in respect of all losses during a policy period.

Maximum Credit Terms (Maximum Payment Terms)
The longest credit period approved for a buyer under the policy.

Maximum Pre-Credit Risk Period
The maximum insured period between contract date and shipment of goods or provision of services.

Minimum Premium
The agreed minimum amount of premium to be paid for a specified period regardless of the volume of declared turnover or outstanding balances.

Minimum Retention
A type of first loss where the minimum amount of each loss that the insured has to bear for their own account is either a specified amount or a percentage of the insured loss.

No Claims Bonus (No Claims Credit, Low Claims Bonus, Reverse Claims Bonus)
An amount or percentage provided to the Insured as a reduction of premium owed, depending on the claims ratio of the policy.

Non-Cancellable Limits
Credit limits which remain valid for the duration of the policy period and cannot be cancelled by the Insurer. Cover, however, may be automatically deactivated on the occurrence of certain defined events, e.g. rating downgrade, overdue payments.

Non Qualifying Loss (NQL, Claims Threshold, Threshold)
The amount below which losses do not qualify for indemnification and are to be kept by the Insured for their own account.

Non-Acceptance of Goods
The refusal or failure of the buyer to take possession of products shipped by the insured.

Non Recourse
The Funder, typically an Invoice Discounter or Factor, credit insure the Clients debts and there is then no call on the client to bear the full loss. Where this facility is in place it conflicts with credit insurance as there can be no double indemnity.

Performance Bond
Typically required to confirm the performance of a service to allow the granting of a contract. It offers security to the party issuing the contract that the contractor is able to fulfil the contract.

Policy
A Credit Insurance contract comprising of Policy Conditions, Policy Schedule and Certificate of Insurance.

Policy Period
The period stated in the Schedule or Certificate of Insurance.

Pre-Delivery Costs (Pre-Despatch Or Work In Progress)
Costs incurred by the Policyholder between the date of the contract of sale and Agreed Delivery Date for which the Buyer is not normally liable under the contract of sale. They normally exclude overheads, profit and damages for breach of contract but can include:

Premium

Amount paid by an Insured client to the insurer in return for risk coverage.

Private Limited Companies
Can have one or more members, e.g. shareholders. They cannot offer shares to the public.

Private Unlimited Companies
These are rare and usually created for specific reasons.

Political Risk
The risk that a government buyer or a country prevents the fulfilment of a transaction, or fails to meets its payment obligations, or the risk that is beyond the scope of an individual buyer or falls outside the individual buyer’s responsibility. Insured Perils include Contract Frustration, Contract

Cancellation, Export Restriction and Import Restriction.

Protracted Default
This is where the Buyer is in default due to non-payment of their contractual obligations and where there is no valid dispute between the parties. Normally at this stage you would have issued court proceedings or passed the debt to a third party debt collection agency.

Public Limited Companies (Plc)
Must have at least two shareholders and must have issued shares to the public to a value of at least £50,000 or the prescribed equivalent in Euros before it can trade.

Quoted Company
A company whose shares are listed on a Stock Exchange.

Quarterly Advance Deposit Premium
See Deposit Premium.

Recourse
The Funder must be repaid by the Client if the debtor fails to pay.

Receivership
Charge or Debenture holders look to isolate and recover their charges and have no duty to unsecured creditors

Rent Guarantees
Gives security to the property owner that the tenant can pay their rent.

Retention Bond
Issued in favour of an employer where they have agreed to waive their right to deduction of retention monies from sums owed to the contractor for work performed. The bond represents the retention percentage, which usually ranges between 3% and 5% of contract price.

Risks Attaching Policy
A policy under which cover attaches based on shipment dates and where the shipment date (but not necessarily the loss) must occur within the policy period. See also Losses Arising Policy.

Romalpa Clause
This was one of the original Retention of Title clauses used in the timber trade and set the standard for today’s wordings.

Securitisation
Asset-backed financing achieved through the sale of trade receivables to a special purpose vehicle which is funded through the issuance of short term debt into the capital markets.

SME
Small to medium enterprise relating to business sizes. Thresholds for this are:
Medium <250 staff | t/o <£40m annual sales or <£34m balance sheet
Small <50 staff | t/o <£8m annual sales or <£8m balance sheet
Micro <10 staff | t/o <£1.5m annual sales or £1.5m balance sheet

Note: values are in Pounds Sterling and should be used as a guide only.

Supplier Payment Guarantee
Gives security to a supplier that they will be paid for the goods and or services that they supply on credit. This can be particularly useful where traditional credit insurance is not available.

Tender Bond
Gives security to employers against the risk of the successful bidder failing to enter into the contract.

Third Country Risk
Exposure to economic and political risks in a country other than the country of the Insured or of the buyer; usually a country through which shipments may pass or where the goods are to be delivered, or the services to be performed.

Top-up Cover (Excess Insurance)
Additional coverage over a credit limit established by the same or another Insurer.

Underwriter
Business, normally an insurance company, charged with risk acceptance, control of that risk and the setting of cover conditions on buyers / credit limits, including any country-specific terms of cover.

Uninsured Percentage (Co-Insurance, Retained Risk, Retention, Self-Insured Percentage)
The percentage of each insured loss that is not indemnified by the Insurer and that the Insured has to bear for their own account.

Waiting Period (Claim Filing Waiting Period)
The period, usually starting from the due date of payment or intervention order, after the expiry of which a claim may be submitted and the loss is assessed.

Whole Turnover Policy
A Credit Insurance policy that covers the insured’s total credit sales (as opposed to Key buyer cover and Single risk cover).

Winding-up Petition
An order presented to a court seeking that a company be put into compulsory liquidation.

Work In Progress (Pre-Despatch)
Labour and raw material costs incurred in manufacturing the goods (including specific materials stored ready for the manufacturing process). Both finished and unfinished goods can apply.