Insight into Trade Credit Insurance HDFC ERGO General

Insight into Trade Credit Insurance HDFC ERGO General Insurance Company Limited

Topics • Credit Insurance – Policy Cover / Not Covered – Why Credit Insurance – Specific Guidelines for Credit Insurance In India – IRDA – Credit Insurance In Practice - Timetable • Processes – Buyer Risk Assessment – Risk Underwriting & Buyer Credit Limit – Online Access and Credit Limit Decision in a Click – Obligation of the Insured • Pricing • Retained Risk and Deductibles • Claim Process Company Confidential hdfcergo. com 1

Understanding Trade Credit Insurance Cash Secured Payment Bank Guarantee / Letter of Credit Methods of Payment Un secured Payment Company Confidential Open Terms hdfcergo. com 2

Policy Covers Commercial Risk : Protracted Default – Delayed payments Insolvency of Buyers Political Risks Covers non payment due to Moratorium Transfer Restriction / Inconvertibility War Import/ Export Restriction Natural Disaster License Cancellation Company Confidential Export Policy Domestic Policy What is covered? Non payment of the buyer when selling on credit terms due to: hdfcergo. com 3

What is not covered? Disputed debts Buyers with debt already outstanding greater than 60 days past due Default of insured, agents/employees Exclusions Arrangements/compromises without our approval Sales to subsidiaries (Controlling interest) Claims in excess of approved credit limits Dishonesty / Fraud of Insured Government bodies Company Confidential Interest / Penalty Currency fluctuations Violation of credit management procedures hdfcergo. com 4

Advantages of Credit Insurance : Balance Sheet Protection 80 : 20 ■ If you are like most companies, 80% of your business comes from 20% of your customers. What if one of your best customers were to unexpectedly stop paying due to bankruptcy, etc. ? Improve your income ■ Manage your bad debt reserve and write-offs with greater certainty – bringing some reserves back to income E V ER ES R T B E DD BA DS Improve cash flow ■ Improve your cash-flow with improved DSO O Increase your sales D DIT E CR IO ER ■ P May allow you to offer open account terms ■ Assists you with entry into new markets ■ Enables you to possibly sell more goods / services on longer credit terms. Company Confidential hdfcergo. com 5

Enhanced credit management Unbiased, third party credit opinions Continuous monitoring of buyer risks Reduce your credit investigation costs Collections Easier to forecast your premiums & write-offs Company Confidential hdfcergo. com 6

Guidelines for Credit Insurance In India - IRDA circular as on 1003 -2016 Whole Turnover policy only allowed Cover a particular Segment/ Product / Country on Whole turnover basis Indemnity Level 85% only Assignment of proceeds of a claim under a trade credit policy may be made to a Bank/NBFC registered with RBI Company Confidential hdfcergo. com 7

Credit Insurance In Practice - Timetable Contract signed Dispatch & invoice Due date Claim / Ascertainment of loss Probable loss Waiting period e. g. 60 days Pre-credit period Credit risk period Max extension period (MEP) Maximum payment terms e. g. 120 days Credit limit decision Company Confidential Invoicing period (max 30 days from dispatch) e. g. 120 days up to Protracted Default Notification of probable loss / (within 30 days of MEP expiry) Apply internal credit management procedures for recovery No cover for future deliveries Date of loss / submit claim within 3 months from MEP hdfcergo. com 8

Processes Buyer Risk Assessment Risk Underwriting and Buyer Credit Limit Online Access Obligation of the Insured Company Confidential hdfcergo. com 9

Risk Underwriting & Buyer Credit Limit • All buyer are assessed and individual buyer limit are assigned • Limit fixation exercise is dynamic process where the limit can be agreed in full, partial or declined with reasons • Decline limits, partial limit can be re-appealed with supporting documents such as trading experience, latest financial information etc. • Risk assessment based on financial non-financial, industry trends, growth and industry trends • TPE Exposure - Cumulative credit limits shouldn’t exceed 60% of Estimated insurable turnover. Discretionary Credit Limit • Discretionary credit limit is a fixed level above which the insured need to apply for credit limits and are covered under the policy subject to fulfilment of DCL criteria as per policy. • DCL is extended only to insured with large number of buyers and who have prudent internal credit management practice in place. Company Confidential hdfcergo. com 11

Online Access. Policy And Credit Limit Information In A Single Click Online System access • Application of Credit Limits, • Downloading Credit Limit Report In Excel. • Automatic Decisions Emailed to Client • Notification of Non Payments Company Confidential hdfcergo. com 12

Obligations of the Insured • • Timely payment of Premium and Credit limit fees Prompt invoicing of sales – Within 30 days from dispatch Monthly statement of turnover Declaration of overdue accounts >90 days Prompt notice/intimation of defaults/ cheque bounce All rights of insured debts to be preserved and exercised Documentary proof of non-payment Confirmation of debt for insolvency Company Confidential hdfcergo. com 13

Pricing and Cost Retained Risks and Deductibles Company Confidential hdfcergo. com 14

Pricing • • • Insurable turnover Credit period or maximum credit period Number of buyer and spread of buyers Trade sector DSO or average collection period Historical losses Current overdue position Internal credit management control Countries where buyers are located in case of exports Buyers grading Cost • Premium is chargeable on estimated insurable turnover • Procession fee of INR 2000 for each domestic buyer and INR 3000 for export buyer (to be collected at inception of policy) Company Confidential hdfcergo. com 15

Retained Risks and Deductibles • • Each And Every Loss – the amount to be deducted from each claim payment to be kept for the account of the insured. Non Qualifying Loss/ Threshold – the amount below which losses do not qualify for indemnification and are to be kept by the insured for their own account. Aggregate First Loss – total first loss amount to borne by insured of the total loss reported in the policy Insured percentage (element of co-insurance) 85% indemnity As per policy loss limitation • Credit limit per buyer • Maximum Liability (IML) usually 40 times annual premium paid Company Confidential hdfcergo. com 16

Claims Company Confidential hdfcergo. com 17

Claim Process • • • Notification of non payment (NNP) to be lodged within 90 days of a debt becoming overdue � Formal claim to be lodged within 3 months from MEP � Documents to be enclosed (as per next slide) � On receipt of all documents Claim Assessment will be done within the next 2 months Case is assessed based on following 1) Limits are in place & invoices are declared. 2) Invoices are within policy period. 3) We draw up reconciliation & check whethere is MEP breach. 4) Disallow unacceptable debt if any e. g. Bank charges, interest etc. 5) Claim amount is greater than NQL ( Non Qualifying Loss) 6) Apply indemnity % of loss. Application of deductibles if any 1) Deduct excess 2) Annual First Loss (AFL) – positive balance after deducting AFL then the claim is paid or else adjusted against AFL. � Once claim has been assessed the following is required • Authority letter for appointment of debt collection agency (case to case basis) • CA certified ledger account of debtor - after claim is approved. • Post claims assessment we will require letter of subrogation • Letter of subrogation – needs to be signed by 2 directors or 1 director and have a company seal Company Confidential hdfcergo. com 18

Documentation Required – Claim Form Duly Signed and Stamped. – Copies of defaulted Invoices acknowledged by buyer. • Evidence of Payment Terms if is it not showing in Commercial Invoices. ( E. g. contract copy) – Debtor’s ledger for the 12 months prior to the oldest outstanding invoice in excel format. – Evidence of Credit Limit / DCL buyer. • If DCL buyer evidence of DCL condition being fulfilled. – Proof of Delivery - LR(Domestic), Bill of Lading. ( Export) etc. – Evidence of Debt. – If PDC is available, then • Copy of dishonored-cheque , Bank Advice, Notice under Sec-138 with acknowledgment of receipt by buyer , Petition under Sec-138 with court case number • Any other legal case papers • Correspondence exchanged with Debtor for recovery Company Confidential hdfcergo. com 19

Key differentiator/ Unique Proposition • • • No Intervention Fees Recoveries post indemnification/ (settlement of claim) – are shared in proportion of liability For E. g. If indemnity is 80%; (limit & exposure – 100, 000)- claim paid 80, 000 – Instance 1: Recovery 50, 000– Insurer retains 40, 000 & 10, 000 is shared with insured – Instance 2: Recovery 100, 000 - Insurer retains 80, 000 & 20, 000 is shared with insured V/S • Most insures post payout, seek to indemnify their share first and the insured later. – Instanace 1: Recovery 50, 000 - Insurer retains 50, 000 until first 80, 000 claims are recovered only subsequent recoveries are shared with the insured Company Confidential hdfcergo. com 20

Recap. . . Company Confidential hdfcergo. com 21

Thank You Company Confidential hdfcergo. com 22