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Commercial & Political Risk Insurance
For many projects, there is a business decision to be made: Does it make sense to purchase insurance given the project’s commercial, credit and/or political risk profile?
Here are some of the factors to consider when weighing this choice.
Why might your project or company need insurance?
- Equity investors may need to guarantee that their assets are covered in the event of bad behavior by a government due to unrest, unstable leaders, foreign currency problems, acts of violence or war, etc.
- You may need to indemnify an investor to qualify for optimal terms when doing business overseas, especially in countries with poor credit ratings, or other potential trade or commercial risk factors (see list below).
- In order to grow your business, you may need to protect yourself and/or a lender or investor partner against certain types of losses. For example, to be able to extend competitive credit terms to your customers, or distributors, or other key players in your value chain.
In other words, what happens if you don’t get paid? You can involve a third party insurance provider to step in and “be the heavy” if the situation would otherwise cause you or your partners to take the hit.
To avoid chain reactions, such non-payment could cause others to experience cash flow problems, mislead you, or do something “commercially stupid” (breakdown in communication) for any number of reasons. In addition, your foreign customers might suffer from currency devaluations, foreign exchange problems, or other political risks. Your customers could go out of business, file bankruptcy, and sue you. You can protect your U.S. and international assets, receivables and/or project equity investors against non-payment risks with an affordable insurance policy.
What specific risks are covered?
Three types of policies are available:
1. Political Risk Insurance coverage includes
- Expropriation –where the government tries to take over
- Currency Inconvertibility and/or transfer restriction
- Political Violence – acts of war, terrorism, civil disturbance, strikes, riots, revolution, confiscation, expropriation, nationalization, embargoes, trade sanctions, and changes in import or export regulations.
- Breach of contract — example of a government offtaker of energy under a long-term power purchase agreement (PPA) with an obligation to pay on a regular basis but that misses one or more payments.
- Non-honoring of financial obligations (non-payment or partial payment) — example of the offtaker canceling or ignoring a Feed-in Tariff, paying a lower amount than the rate established in the PPA.
Just reading this list can be stressful for some professionals. Might it be wise it to protect yourself against these or other factors that are entirely outside your sphere of influence? That way you can focus on other matters, or more fully focus on doing what you do best, and enjoy the “soft pillow” effect of not having to subscribe and read newspaper headlines and news feeds to anticipate and react to tough-to-control conditions that lead to these downsides. Download our PRI executive brief.
2. Credit Insurance protects your receivables against virtually all commercial and political risks that could result in non-payment of your invoices. Commercial risks include
- Receivership and other kinds of insolvencies and non-performance
- Protracted defaults caused by cash flow problems, balance sheet issues, market demand, bad faith, currency fluctuations, natural disasters, or general economic conditions in the USA or other countries.
3. Commercial Insurance covers the asset owners in the event of technology underperformance or human error or other types of losses, either from third party insurers or from certain contractors (e.g., engineering, procurement and construction firms) who need to guarantee their work. Many other commercial
NOTE: In3 Finance is a designated Political Risk Insurance (PRI) originator, and it is our duty to answer any and all of your questions before you decide whether or not to purchase coverage. PRI is only recommended when the country or circumstances warrant it, which largely depends on the specific country’s credit rating, its stability, history, and the investor(s) tolerance for risk.
Usually, but not always, BBB- or higher credit scores (for bond rating purposes, this is just one category above “junk”) are adequately secure without PRI, but this is too simplistic to be used as a guide. Any country with unstable governance, that is subject to unrest or political violence, with too frequent or too infrequent changes in leadership, or that is located adjacent to or within zones of geopolitically contentious issues can lead to unforeseen losses. (Surprisingly, the Middle East, with all its notorious political tension and conflict, is not automatically considered among the more volatile places for private-sector investments.)
How much does such an insurance policy cost?
Political Risk Insurance: PRI policy costs are based on the coverage terms required for the specific project investment, but are generally quite affordable — typically about 1% (0.5% – 1.5%) of the amount insured in annual premiums.
Credit Insurance: Premium rates for credit and risk insurance are based on the terms you extend, the spread of your buyer and country risks. For credit insurance, your previous credit and collections experience factor in. The cost of accounts receivable insurance is low, typically a small fraction of one percent based on sales volume.
Whether or not you pass this incremental expense to your customers, the price of credit insurance coverage is often insignificant compared to the additional business you can obtain by extending competitive credit terms here and overseas.
The time to make this decision is while raising additional capital. Together we can make the necessary calculations and estimate the likely cost/benefit up front. Contact us.
Credit (Trade) Insurance as a sales and financing tool
- Increase your sales and profits by using credit insurance to extend payment terms – that make it more economical for your customers to purchase larger quantities. Shipping bigger orders can help you negotiate better pricing from your suppliers, make longer manufacturing runs, and reduce your inventory carrying costs.
- Negotiate stronger representation by using accounts receivable insurance to offer competitive credit terms to your distributors and sales reps. Provide incentives to keep more of your products in the supply chain, increasing your market share and brand recognition.
- Open new markets by extending credit terms that, without accounts receivable insurance, your company might otherwise perceive as too risky. The opportunity to penetrate and establish market share in emerging markets and industries has never been greater.
- Enhance your borrowing capacity and obtain more favorable financing by using insurance to include more of your receivables in your collateral base. Accounts receivable insurance makes your A/R more attractive to banks and other lenders, especially if your portfolio includes foreign receivables, concentrations of risk, cross-aged receivables, or sales into countries or industries outside your bank’s comfort zone. You can assign credit insurance policy proceeds to the lender of your choice.
- Strengthen your balance sheet and keep your company’s financial position secure with credit insurance coverage, despite exposure to unforeseen events, concentrations of credit risks, and changing market conditions.
- Covering your sales with accounts receivable insurance may also enable you to reduce your bad debt reserves.
- Credit insurance can help facilitate the “true sale” of your receivables on a case-by-case basis or in the context of a formal asset securitization.
Why work with In3 Finance?
Since 1996, In3 Group and its affiliates have helped hundreds of companies de-risk their investment proposal, increase their sales, and improve investibility using strategies such as insurance wraps and performance guarantees.
All insurance policies are backed by major, top-rated firms and re-insured commercial insurance companies or by an agency of the U.S. government. Our affiliates can underwrite a wide variety of accounts receivable insurance policies, enabling us to quote the most competitive premium rates in the market.
We listen and understand your business. Our staff is multicultural and multilingual (English, Spanish, German, Portuguese, Danish and Dutch), with affiliate experience in political risk, accounts receivable insurance and trade credit as well as renewable energy/infrastructure, manufacturing, operations, startups, logistics, sales, marketing and distribution.
Contact us for further details.
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