Lukewarm response to EXIM Bank trade credit insurance

Avia Collinder, Business Writer

A trade credit insurance (TCI) facility at EXIM Bank Jamaica that provides backing for uncollected sales receipts has failed to excite small companies, only a few of which are subscribers to the accompanying loans offered as working capital to cover gaps in payment.

Companies have bought some J$1.6 billion of insurance coverage against their receivables, and policyholders could potentially borrow up to 80 per cent the equivalent on 120-day or four-month cycles at rates of 11 per cent per annum.

But loan subscriptions under the so-called Insurance Policy Discounting Facility (IPDF) in the past three years have averaged only J$56 million annually or about 3.5 per cent of coverage bought, according to data provided by EXIM chief officer, operations and insurance, Shernett Manning.

Credit available to each policyholder is not determined by the amount on the policy, but is based on a special buyer credit limit (SBCL) assigned by EXIM. To change the dynamics and grow demand for IPDF credit, EXIM is now actively marketing the insurance facility, the agency executive said.

Policyholders last year spent J$10 million on premiums for the J$1.6 billion of coverage of receivables, but only accessed J$57.5 million in loans. In 2009, loan subscriptions were more robust at J$67 million; rising from J$43.5 million in 2008.

Policy subscribers pay a premium rate of J$0.60 per J$100 of receivables for both local and international insurance coverage.

"We insure shipment by shipment on a monthly basis. If there are no shipments there is no premium paid and the trader sends in a nil declaration for that month," said Manning.

She said 60 per cent of premiums is ceded or paid over to reinsurers based in Europe who in turn cover 60 per cent of EXIM's insurance liabilities incurred under the IPDF.

The trade insurance facility is available to small and large companies, but the latter tends to utilise other credit windows with more resources to cover their trade receivables, Manning said.

She insisted that take-up under the IPDF would be more buoyant if the product had "more exposure" among its main target - small companies.

access limited

However, her other explanations suggest that small policyholders see no need to fully consume the available capital at a future cost to their operation because they tend to do business with clients they trust to pay their bills; and that EXIM's own due diligence also limits access.

"The perennial drawback is that in our limited economic landscape, good relationships exist with buyers and this affects the demand for TCI," the chief officer said.

"The lower than expected take up of the insurance-backed facility, the Insurance Policy Discounting Facility, is due to the fact that it is usually the larger companies that insure their receivables as part of their risk management. These companies require large loans and utilise other facilities offered by the EXIM Bank ... . Additionally, small companies that are interested in the IPDF have very small buyers and in many instances, we are unable to find credit and banking information on them."

The IPDF offers commercial risk coverage to businesses against the non-receipt of payments by both foreign and domestic buyers up to 85 per cent of the insured value. The facility gives producers access to working capital financing for the acquisition of raw material, and policies are usable as collateral for revolving loans based on EXIM-approved buyer limits.

"At EXIM, each buyer - foreign or local - is assessed in terms of financial strength and stability, and a dollar-value limit is assigned. A policyholder would therefore not declare shipments/sales to a buyer in excess of our SBCL as, in the case of a loss, our exposure would be limited to the SBCL," Manning said.

"It is good insurance practise to enter into a co-sharing arrangement to ensure that the other party has a monetary interest in each transaction. We therefore insure 85 per cent of each transaction, the other 15 per cent being borne by the policyholder."

Last year, EXIM paid claims totalling approximately J$4.2 million, 60 per cent of which was reimbursed by reinsurers.

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