About 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, completion, vendor performance, credit and/or political risk profile, or to see if the increased cost of financing (most sources are “risk-adjusted”) would cost less?

Some of the factors to consider when weighing this choice:

Why might your project or company need insurance?

Project developers that hire vendors usually will want those vendors to bring various type of bonds (performance and/or completion guarantees), and with In3’s CAP funding, that may be an additional layer of protection.
Most 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” (close the gap between what you would have been paid if things did not go wrong) 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, deliberately mislead you, or do something “commercially stupid” (no longer operate out of good faith, leading to a breakdown in communication and/or legal action) 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.

For project finance (contrast that with venture finance or trade finance), we encourage developers that plan to hire contractors hired to engineer or construct the project’s assets to request performance/completion insurance or other warranties on their work. That said, our flagship funding uses capital (financial) guarantees, not insurance, to accomplish similar goals but also provide access to advantageous project funding. For more on the differences between financial guarantees and insurance, see this Success Tip.

What specific risks are covered?

Three types of policies are available:

1. Commercial Insurance covers the asset owners in the event of technology underperformance, sometimes covered by the EPC or construction firm (engineering, procurement and construction firms or general contractors, etc.) that build the project (as “performance” or “completion” bonding), or due to commercial contracts from less-than-creditworthy offtakers, or because customers are unwilling or unable to make a commitment to purchase the project’s outputs over long enough period to make it investible, or other hazards, such as weather. Examples:

Pricing floor insurance — a guarantee that commodity commercial prices will not go below a specified amount
Crop insurance in agriculture and other ways to offset the X factor known as weather
Failure to perform by companies, personnel, commercial contracts ….

There are policies available in case of human error or other types of losses, either from third party insurers or from certain contractors (beyond the aforementioned EPC or construction firms) who need to guarantee their work. Main three are offtake pricing, performance insurance and completion bonds for work performed, as mentioned above.

In3 uses an alternative approach to this, via our Capital Guarantee Program™ (more), but developers may want to also obtain such coverage, or comprehensive insurance “wraps”, as a precondition of hiring contractors. Sometimes an “at large” guarantor (acting as a sponsor of a project, receiving compensation according to an agreement with the developer) will be named by the policy offering such coverage, as their financial guarantee effectively offsets the developer’s risk of non-completion.

2. 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 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.

3. Credit Insurance protects your receivables against virtually all commercial and political risks that could result in non-payment of your invoices. Commercial credit risks include

Bankruptcy
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.

Many other commercial insurance products are widely used, even some that are customized or for “captive” self-insurance (more on this), but the above covers the most common ones.

NOTE: In3 Finance and several of our partners are designated Political Risk Insurance (PRI) originator, and it is our pleasure 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. Our in-house capital (CGP) does not require PRI.

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.)

Take a look at this list of country credit ratings by the three major agencies for indications of country risk.

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.

Related: Differences between insurance and financial guarantees