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Understanding Political Risk Insurance Coverage Definitions

When it comes to insurance, one of the most important lines an insurer can offer for any company working in a developing country is political risk insurance.

Political risk insurance can be offered by financial institutions, a private insurance company, or a public agency. And while each policy will vary, they are all intended to do the same thing – safeguard companies who are undertaking long term projects and customers in emerging markets.

Unlike in stable, developed markets, there is always a risk of business delays and losses due to political instability and upheaval in emerging markets, and that’s what’s covered by political risk insurance coverage. Learn more about the most common political, economic, and financial issues covered by this type of insurance now.

  1. Contract Breach Or Contract Frustration

If a foreign government breaches its contract for any unfounded reason, a political risk insurance policy will cover the associated costs and losses, making one of these policies very important for risk management.

Contract frustration is also covered by political risk insurance. Frustration occurs when, due to unforeseen circumstances like a political revolution, one party in a contract is unable to uphold its end of the deal.

  1. Political Violence And Upheaval

Every form of political violence is covered by a political risk insurance policy, including civil war and wars abroad, armed rebellion or insurrection, civil disobedience that causes major upheaval, and other government action or action by citizens that could damage your profits and cause your project to fail, resulting in financial loss from forced abandonment.

  1. Expropriation Or Nationalization Of Property Or Assets

This is of particular importance to infrastructure developers. If their property is confiscated or nationalized by a government, they will be compensated for the financial loss of their private property.

An example of this would be when Venezuela, under Hugo Chavez, expropriated and nationalized 11 oil rigs from a US-based drilling company, Helmerich & Payne. Thanks to a political risk insurance company, the owners of these rigs were able to recover $43 million.

  1. Foreign Currency Inconvertibility, Inability To Repatriate Funds

Even if a business transaction in a developing market is successful, there is the risk that the funds may not be able to be converted back into the proper currency, or that the government or a bank may block the repatriation of funds. In this case, political risk insurance coverage will compensate for the loss.

  1. Business Interruption

Business interruption is often covered in tandem with other protected events. For example, a company that has its business interrupted by several weeks of rioting and protests may be covered for business interruption due to political violence.

  1. Government Default On Payments

In the event that a government simply refuses to pay you for the services or goods which you have rendered to them, your political risk coverage will cover this loss.

  1. Import/Export License Suspension Or Revocation

If your license is suspended due to political reasons, or revoked, political risk coverage will typically compensate you for the losses related to this loss. Note that this may not be true if you were conducting illegal activities, or if you were found to violate import/export regulations.

Coverage Varies Based On Your Policy – So Do Your Research!

Depending on the policy you purchase, your coverage may vary quite a bit. Every insurer offers a different type of political risk insurance, and the cost will also vary, based on the assets you need to protect, and a number of other factors.

To make sure that you have the political risk insurance that you need to protect your company, you should get help choosing a policy. At Niche Trade Credit, we have more than a decade of experience working with top insurers as an insurance broker. We can help you pick out the right political risk insurance product, and get a great rate. Contact us now to learn more.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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What Experts Think

What Does a Trade Credit Insurance Policy Cover?

A study published in 2016 from MarketWatch found that Australian businesses are the worst at paying their invoices on time. As an Australian business owner, you want to make sure that your company is protected from insolvency and bad debts. In today’s global economy, it’s also crucial that you protect your bottom  line from political risks. Can a trade credit insurance policy help protect your business and increase your growth? At Niche Trade Credit, we’ve been helping Australian businesses find the best credit insurance coverage for their needs. Today, we’ll explore how trade credit insurance policies work.

How does trade credit insurance protect a business?

When a business sells its goods and services on credit, it puts itself at risk of non-payment. If the buyer is unable to pay for the goods and services after they’ve already received them, the business can be seriously harmed. Cash flow, profitability, and balance sheet problems can

hit your business when buyers don’t pay. Worst case scenario? The company will fail.

So, what can companies do to protect themselves? They can purchase a trade credit insurance policy to cover their losses in the event of non-payment. Trade credit insurance helps businesses maintain a positive, predictable cash-flow so that they can remain competitive in their industry and prevent business failure.

A trade credit insurance policy gives suppliers with the accounts receivable protection they need to protect their business from a buyer default. That includes defaults because of the buyer’s financial instability, or even widespread political instability. Trade credit insurance solutions can protect part or even all of a client’s account receivables. In some cases, policies can also give business owners the ability to set buy credit limits and manage those limits via online systems.

Businesses of all sizes can use trade credit insurance to protect international and domestic trade. Trade credit insurance can also help companies secure financing and working capital from lending institutions, and enable companies to explore new markets and attract new customers with attractive credit terms.

How is the level of coverage determined?

When it comes to trade credit insurance, there is no “one-size-fits-all” policy. Your specific needs and goals will dictate the amount of coverage and the cost of the policy. The size of your credit portfolio, the level of risk associated with your customers, and where your market is located are important insurance factors that will be unique to your business and industry. A trade credit insurance policy is tailored to your particular business. It’s crucial that you reach out to a knowledgeable credit insurance company to discuss your specific needs and your business goals so you can get the best value on a trade credit insurance policy.

What are the significant benefits of a trade credit insurance policy?

Protecting your company from bankruptcy isn’t the only thing that trade credit insurance can do for you.

  • Increase your customer base since new leads will be attracted to your improved credit terms.
  • Expand your market since you’re protected from political calamity.
  • Insured cash flow means you can build stronger relationships with employees and suppliers.
  • Enhanced credit terms can help you retain the customers you already have.
  • Increase your access to favourable credit terms from banks.
  • Give your stakeholders or board increased peace of mind with trade credit insurance protection.
  • Decrease your tax liability by using your credit insurance as a tax-deductible business service.

Are you ready to reap the benefits of trade credit insurance solutions, and rest easy knowing your company is protected against insolvency and failure? Please contact our knowledgeable representatives at Niche TC today. Together, we’ll explore your options for a trade credit insurance policy that will protect your business and accelerate your growth.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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What Experts Think

What Is Pre Credit Loss In Credit Insurance?

If you are interested in an insurance product like trade credit insurance as a way to simplify risk management and protect your balance sheet from protracted default, you probably have quite a few questions.

For example, what is a pre credit loss? What does it mean – and why do you need a policy that includes pre credit coverage? In this article, we’ll discuss the basics of pre credit loss in credit insurance, and why it’s important for credit management, avoiding bad debt and protecting your cash flow.

Defining Pre Credit Risk

Pre credit risk is, essentially, the risk that your buyer will cancel or will be unable to honor the contract terms before your products are delivered. 

For example, if you create and manufacture a custom product that has a six-month production time, and your buyer goes bankrupt before the products can be delivered, this is a pre credit loss. 

The same is true of products that can no longer be shipped due to political risk, such as civil unrest or banking issues. These are also covered in the terms of pre credit risk insurance. 

Without working with insurance companies for pre credit risk insurance as part of a trade credit insurance policy, you may find yourself in a difficult situation where your buyer cancels the contract, but you are unable to get compensation for your products.

Pre Credit Loss – Losses Caused Before Delivery Of Goods/Completion Of Contract

There will typically be a waiting period of about 30 days before you are compensated. This may vary based on your insurer. Trade credit insurance policies typically will reimburse you for all working costs and losses you sustain as a result of the pre credit loss, including:

  • Production costs
  • Net of profit margin
  • Advance payments which you cannot recoup due to the buyer cancelling the contract

Usually, however, you will not be compensated fully, but with a payment calculated as a percentage of your loss. For example, your trade credit insurance policy may compensate you for 85% of your loss, as outlined in your policy, within your credit limit for the particular buyer.

The Importance Of Pre Credit Insurance Coverage

So, why is pre credit insurance such an important part of trade credit insurance, and a valuable method of credit management? Here are a few reasons it’s such a useful insurance product.

  • Reduces risk of taking on long-term projects – With pre credit insurance coverage, you can take on long-term manufacturing projects without worrying about your buyer defaulting – reducing risk and allowing you to take more complicated projects from your buyers.
  • Protects your cash flow – You won’t have to worry about losing money due to buyers breaking your contract – your cash flow will be protected and you’ll be compensated for your losses.
  • Comprehensive coverage – Pre credit insurance coverage doesn’t just compensate you for your profits, but also for costs incurred when designing, developing, manufacturing and transporting your products – and more. 

Learn More About The Benefits Of Pre Credit Loss From Niche Trade Credit!

At Niche Trade Credit, we specialise in providing our customers with the insurance they need to protect their businesses in Australia. As a leading trade credit insurance broker, we can help you understand everything you need to know about trade / bad debt insurance – and pick the policy that’s right for you. Contact us now to get started, by calling 02 8416 0670.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.