Credit insurance and surety are closely tied to economic development. Credit insurance is a risk management tool that compensates policyholders when their clients fail to pay for goods and services credit insurance enables sellers to extend credit more liberally and surely compensates the beneficiary if contractual legal or regular obligation is not met.
The legal need for surety is more important for the economic well-being of the country. Companies undertaking projects for government or semi-public institutions guarantee their work with surety bonds.
Credit insurance and surety are differently used in different countries according to their specific rule and regulation the need for credit insurance is observed because of the rising international trade faster than GDP and growing specialization.
Exported and domestic trade has opened an emerging market for credit insurance the global surety insurance is expected to grow with rising GDP it is openly demanded in the Asian and European markets.
The general insurances are the underwriters of credit insurance and surety the credit insurance depends upon the financial market particularly banking products the factoring companies in the USA by company receivable for immediate and discounted payment, therefore, the factors often by credit insurance to cover the risk of not collecting then trade receivable.
Credit insurance companies control their exposures through limit management as they provide cover for 60 to 120 days. They gain better with the use of information for technology for the credit quality of policyholders and risk accumulation reinsurance companies cover 50% of the credit insurance.
Similarly, surety guarantees also decrease. Credit insurance and surrey bonds guarantee insurance that the commitments will be fulfilled. Credit insurance assures payment and surety assurance performance.
Suretyship is a bond and contract in which the insurer provides a guarantee to the policyholder or beneficiary that a third party i.e., the principal will meet its contractual, legal, or regulatory obligations. For example, a contractor is engaged in constructing a building as per specification but the office room should be constructed first within 3 months.
If the contractor fails to finish the work on some valid ground, the surety company undertakes the construction work. The contractor is known as the principal and the building owner is a beneficiary. The contract may be of any commercial nature.
Suretyship includes a performance bond, advance payment bond, labor, and material payment bond, and maintenance bond. Similarly, commercial bonds include customs bonds, tax bonds, license and permit boards, and court bonds.
A surety bond increases the likelihood of a project being completed as initially agreed upon. It enhances the principal’s creditworthiness. The surety company’s expertise in pre-qualifying the principal. Surety involves disciplined underwriting, exposure management, and the use of reinsurance.
Background of credit insurance and surety
The first credit insurance that took place in 1820 principally offer fire and life insurance by the British Commercial Insurance Company. The surety market started in 1984 in the USA which required the purchase of surety bonds on construction projects.
Credit insurance and surety cold do not develop much Credit insurance policies have covered commercial risks with the experience of last years. It has developed gradually over the last 15 years. The political risks are covered only in combinations of commercial risk coverage.
Short-term credit is covered to provide for consumer goods, spare parts, and raw materials. Medium-term credit covers capital goods. Credit insurance is being helped.
The premium volume of credit insurance increased from $ 4340 million in 1990 to $ 659 million in 2004. Western Europe constitutes more than 70 percent of the share premium. 0.016 percent of GDP is collected as premium credit insurance worldwide.
The suretyship premium increased from $ 5391 million in 1998 $ 7644 to $ 7644 million in 2004. 0.019 percent of GDP is collected as a premium for suretyship.
Functions of credit insurance
Credit insurance protects a seller from the risk of buyer nonpayment, which may occur due to commercial or political risks. The commercial risks cover buyer insolvency and extended late payment is a protracted default.
A political risk involves nonpayment on an export contract or project due to the government’s actions. It includes intervention to prevent the transfer of payment, cancellation of a license, acts of war or civil conflict, or the government’s enactment of laws or other measures.
Credit insurance gets the right of collection directly from a buyer who failed to pay a seller. The credit insurer pays the amount of trade credit to a seller if a buyer fails to pay the seller.
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