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Surety Trade Credit, Surety, Credit Political and Financial Risks

Contents
RFIB S Surety, ret Credit Credit, Political & Financial Risks Str Structure ct re Our services Surety Surety Reinsurance y Underwriting g Surety Trade Credit Political Risk Letter of Credit Factoring Contacts 3 4 5 13 19 20 22 23 28 31

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RFIB Structure
Surety, Credit, Political & Financial Risks

Surety, Trade Credit & Financial Risks

Political, Credit & Financial Risks

W j i h Lazarski Wojciech L ki

J kA Jack Avedik dik

T b Heppel Toby H l

Mik Martin Mike M ti

L i Green Louise G

Jon Bishop p

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Our Services
Placing portfolios/risks on proportional, non-proportional and facultative basis Well established cooperation with key reinsurers overseas and London Market Reinsurance advice, consultancy and training services for our clients Efficient back up processes (accounts, claims and settlements) Strong presence in Central and Eastern Europe Arrangement of co-operative underwriting programmes for national Export Agencies and Multilaterals including: Multilateral Investment Guarantee Agency (USA), Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), African Trade Insurance Agency , Arab Investment and Export Credit Insurance Corporation (Dhaman)

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Surety - What is a Bond? Bond ?

a Bond is a guarantee = a Contract guaranteeing the performance of a specified obligation. It is an arrangement by one party to answer to a second party for the debts, default or non-performance of a third party Effectively a surety bond (=insurance guarantee) is a risk transfer mechanism and thats why it fits into insurance industry so well

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Surety - Parties to a Bond

1 1. 2. 3. SURETY = takes the risk PRINCIPAL = they are the risk BENEFICIARY= wants something done

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Surety - Parties to a Bond

Performance

Principal /Contractor
Payment

Beneficiary / Employer

Premiums Collateral

Bond

Claims

Right of subrogation

Surety

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Surety - Main kinds of Bonds

1. Contract Bonds assure proper performance of contractual obligations (mainly in construction projects)

2. Commercial Bonds bonds secure the performance of legal or regulatory obligations

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Surety - Contract Bonds

- Bid (Tender) - ensures the bid is made in good faith and guarantees to the Employer that the Contractor will enter into contractual obligations - Advance Payment - guarantees to the Employer that monetary advance to the C t t will Contractor ill b be expended d d on th the contract t t and/or d/ repaid id b by th the C Contractor t t accordingly - Performance - assures that a Contractor will carry out the work in accordance with the terms of the contract - Delivery - guarantees proper delivery of materials/goods in the time laid down in the contract - Maintenance - involves indemnity that the completed work will be satisfactory and of required standards
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Surety - Commercial Bonds

- Customs - assure customs authorities that an importer will pay the import duty - Tax - ensure a proper declaration and payment of taxes - License and Permit - secure compliance with laws protecting community safety and welfare - Court - secure the p performance of legal g duties and compliance p with court orders

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Surety - Risk & Loss

1) Definition of Risk a) Bonds: Maximum aggregated amount of bonds issued per Principal, all bonds combined. b) Credit: Maximum aggregated credit limit issued per Buyer Buyer, all policies combined as well as the aggregation of all discretionary limits for a given Buyer. 2) Definition of Loss a) Bonds: accumulation of all claims made by all concerned parties as regards non fulfilment by the given principal of the obligations stated in any bond. b) Credit: the accumulation of all claims made by all insured parties concerned (policy holders) in respect of non non-payment payment by a given Buyer of outstanding invoices, invoices due to commercial or political reasons. It is possible to have accumulation across various products
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Surety - Risk & Loss

USD 25M Maximum Limit / Facility per Risk
21m
USD 20M

Bond Duration

18m

19m

19M loss

Exposure

Value e at Risk

USD 15M

13m

10M USD 10M 8M

8m

6M USD 5M 3M

Bankruptcy

01/01/12

01/06/12

31/12/12

01/06/13

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Reinsurance - Definitions
Facility = Limit on a Risk Sum total of all valid bonds and/or granted limits (Credit) across all underwriting years for the given RISK, i e the accumulated exposure of all life i.e. life bonds and/or life life trading limits at any point during the validity period of the facility. Automatic Limit = Standard Limit Reinsured is allowed to underwrite freely up to the agreed limit from ground up (FGU) (FGU). Standard cession/retention split applies. Special Limit Leading Reinsurer only approves an increase in the facility for a period of time time. This increased Limit may be subject to different treaty parameters (e.g. different % cession/retention). Named Risk All reinsurers must agree a large capacity which exceeds both Automatic and Special Limits Limits. It is likely to be subject to different treaty parameters . Facultative Capacity Very large capacity for a Risk that exceeds all treaty limits limits. May be placed with treaty reinsurers or outside the treaty or in combination. All granted limits are subject to renewals.

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Reinsurance Basis of Operations

Surety Reinsurance can be written on different basis of operation: 1) Risks attaching=policies issued or renewed as per the date of commencement of cover. 2) Losses occurring during losses that occur during the period of reinsurance, irrespective of inception date of the original bond or a trade credit limit. 3) Losses discovered or reported = claims made covers losses discovered or claims made during the specified period of reinsurance. This ignores inception date of the original policy or the date of the occurrence of the loss. This is particularly suitable to long tail business (liability) or business where it is difficult to identify when the loss happened (like bonds) bonds). Common use in the US XoL contracts. Good Advice: It is strongly advisable that any combination of R/I contracts should follow the same basis, i.e. back to back(otherwise there is danger of gap in cover) The most common and practical is Risks attaching. It is easiest to administer for all.
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Reinsurance Basis of Operations

Risks Attaching a) in respect of a single bond, both premium and losses attach to the underwriting year in which the bond is issued/ cover started. b) in respect of a bonds facility, both premium and losses attach to the underwriting year in which each bond is issued / cover started (Same as above!!!). ) The facility is there purely to control the limit. In respect of Credit other principles may apply. Typically both losses and premium will attach to the year the limit was granted. Premium follows f the bonds issue date and losses f follow the premium.

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Reinsurance - Allocations of Risk / Accounting under Quota Share

Automatic Limit = Standard limit basic % split cession/retention All bonds issued prior to granting of an increased Facility will continue to be accounted in accordance with the basic % split cession / retention as per the Automatic Limit arrangements. Special Limit and Named Risk All bonds issued during the validity of a Special Limit or Named Risk facility will be accounted in accordance with the conditions applicable to such the Special Limit/Named Risk which are often different (different % split cession / retention). Once split p agreed g it will always y apply pp y If the current accumulation drops below the level of the Automatic Limit (while the Special Limit / facility is in force) - any newly issued bond(s) shall be allocated in accordance with the Special Limit arrangements despite the fact their accumulation remains below the Automatic Limit.

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Bond Start / Attachment Point

Risk and Facility Allocation

Facility
USD 20M

Duration Cumulative Exposure

Total Facility = USD 20M

Total Facility = USD 5M

Total Facility = USD 10M

Total Facility = USD 15M

Limit o on a Risk

Standard Lim mit

50/50 Cessio on

USD 5M

75/25 Ce ession

USD 10M

Special Limit

84/16 Cession

USD 15M

Named Risk

Facultative e

01/01/12

Underwriting year 2012 01/06/12

31/12/12

Underwriting year 2013 01/06/13

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Reinsurance - Structures
The most suitable protection for Bonds (and Credit) is a Quota Share: V i bl Variable Special Limits Named Risks If net retention is a problem Quota Share with an Excess of Loss on retention Facultative (Individual risks)

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Successful Bonds Underwriting

Centralised / Accumulation Control Independent, but cooperating with Legal and other (e.g. CAR) departments Professionals (banks / accountants) IT and data base on credit history Rating / Scoring systems Zero-loss assumption Can be very profitable if underwritten carefully & priced appropriately.

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Trade Credit
Trade Credit Insurance provides protection against the non payment of trade receivables due to commercial risks and/or political risks: Commercial Risks: - The insolvency of the buyer - The default on payment by a private purchaser at the end of the credit period or after some specified period following the expiry of the agreed term of credit. (Protracted default) Political Risks: - War and related disturbances - Confiscation, expropriation and nationalisation of assets by sovereign authorities

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Trade Credit
Seller / Insured
Goods and trade credit Payments for goods Credit Insurance Contract Cover of non Payment risk

Buyer / Risk

Premiums

Credit Insurer

Right of Subrogation*

The right of subrogation provides a trade credit insurer that has paid a claim the contractual right to collect directly from buyer who has failed to pay pay.

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Political Risks
Political Risk insurance enables the transfer of political risk: Risks to cross border investment: expropriation, selective discrimination, forced divestiture, creeping expropriation, breaching investment agreements or guarantees guarantees, nationalisation nationalisation, embargo and sanctions Risks to physical assets: deprivation, forced abandonment, sabotage and terrorism, war damage, confiscation Risks to international financing: g inconvertibility y risk, ,p political violence, , expropriatory acts, non-honouring of government guarantees, breach of contract

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Letter of Credit
L tt of Letter f Credit C dit are financial fi i l instruments i t t used di in international i t ti l trade t d when h suppliers or vendors do not have established business relationships with their counterparts.

A Letter of Credit is a promise by a bank on behalf of the buyer to pay the seller a specified sum in the agreed currency, provided that the seller submits the required documents by a predetermined deadline.

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Letter of Credit
Elements of a Letter of Credit: A payment undertaking given by a bank (Issuing Bank) On behalf of a buyer y / importer p (Applicant pp ) To pay a seller / exporter (Beneficiary) for a given amount of money. On presentation of specified documents representing the supply of good Within specified time limits Documents D t must t conform f to t terms t and d conditions diti set t out t in i the th letter l tt of f credit dit

The issuing bank makes commitment to honour drawings made under the credit.

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Letter of Credit
Importer
Purchase & Sales Agreement 1

Exporter

Request for a Letter of Credit 2

Credit Insurer

Confirm of Letter of Credit 4

5 Buys a Letter of Credit I Insurance 3 Request to Confirm the Letter of Credit

Issuing Bank

Confirming bank

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Letter of Credit
Letter of Credit insurance policy insures against the non-honouring of the obligations by the foreign g buyers y bank issuing g irrevocable letter of credit due to commercial and p political risks. Policyholder: y Confirming Bank Risk: Non Honouring of a letter of credit by the issuing bank of the foreign Buyer / importer where the bank has no right to refuse payment to seller/exporter. Purpose: Letter of credit confirmation Insurance allows banks to confirm letters of credit from foreign financial institutions (issuing bank) bank), the risks of which they would not have accepted without such Insurance.

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Letter of Credit
Risks Insured: 1) Commercial Risks Insolvency of the issuing Bank Failure or refusal of the issuing Bank to provide Reimbursement on the due date.

2) Non - Commercial Risks Currency transfer restrictions imposed by the government of the issuing banks country Expropriation, confiscation of or intervention in the business of the issuing Bank by a governmental authority. Bank s country country. War or civil disturbance in the territory of the issuing Banks
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Factoring
Factoring is the selling of invoices or accounts receivables by the business holding them at a discount in order to obtain cash payment on the invoices before their actual due date.

The p parties involved in the Factoring g transaction are: 1. Exporter or Seller (Client) 2 Importer or Buyer (Risk) 2. 3. Financial Intermediary (Factor)

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Factoring
Exporter
Purchase & Sales Agreement 1

Buyer

Sells Invoices 2

4 Instructed to pay the invoices in accordance with the date and terms of the factoring treaty

Factor

3 Insures the invoices

Credit Insurer

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Factoring
Process involved in Factoring 1. The Exporter sells invoices to the Factor i.e. Bank 2. The Factor buys the invoices without recourse and pays the seller 3. The Factor Insures the invoices with a Credit Insurer 4. The Credit Insurer issues credit limits for each buyer y 5. The Buyer is instructed to pay the invoices directly to the bank Risks Insured:
1) Commercial Risks Insolvency y of the Buyer y Failure or refusal of the Buyer to pay the invoices to the factor at the end of the credit period or after some specified period following the expiry of the agreed term of credit.

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Contacts:
MrWojciechLazarski Email:Wojciech.Lazarski@rfib.co.uk Tel:+44 (0) 207 621 8347 MrJackAvedik Email:Jack.Avedik@rfib.co.uk Tel:+44 (0) 207 621 8252 MrsLouiseGreen Email:Louise.Green@rfib.co.uk Tel:+44 (0) 207 621 6838 MrTobyHeppel Email:Toby.Heppel@rfib.co.uk Tel:+44 (0) 2030042846 MrMikeMartin Email:Mike.Martin@rfib.co.uk Tel:+44 (0) 207 621 6398 MrJonBishop Email:Jon.Bishop@rfib.co.uk Tel:+44 (0) 207 6218314

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