Friday, April 18, 2014

Underwriting Philosophies

There are two primary underwriting philosophies in the credit insurance industry:

Ground-Up Underwriting:

Coverage is traditionally written with no (or a low) deductible and no (or low amount of) discretionary authority. Hence, the insurance company underwrites each buyer of the insured company’s portfolio from the "ground-up." To establish a customer credit limit, the insured typically must only provide the name and address of the buyer. The insurance company will research the buyer independently, assess its creditworthiness, and render a credit limit decision. There are cases when the insurance company cannot obtain adequate information on the buyer with which to underwrite the credit. The underwriters will then look to the insured to provide additional information (i.e., financial statements).

The ground-up insurers can offer Discretionary Credit Limits (DCLs) if they are requested. A DCL allows the insured to extend credit to a buyer up to a predetermined maximum amount without obtaining the formal approval of the insurance company. In many cases, the ground-up insurers will require an annual aggregate policy deductible (not a per loss deductible) in an amount equal to the DCL. They may also have a separate aggregate limit of liability for buyers qualified under the DCL.


Ground-up insurance companies in the United States include Atradius, Euler American Credit Indemnity, and COFACE. All types of companies, large and small, utilize ground-up insurance. Companies with less developed credit departments or those lacking experience in foreign credit may fit well with ground-up underwriting, as it enhances the credit evaluation process. Additionally, many experienced companies also prefer ground-up underwriting in new or fast growing markets because it allows them to out-source a portion of the credit evaluation function, which in-turn allows them more time to attentively monitor accounts receivable and focus on collection.

Excess of Loss Underwriting:

Coverage is structured with an annual aggregate policy deductible and typically with ample amounts of discretionary authority, which allows the insured company to retain much of its credit authority. Excess of loss insurers typically offer DCLs that are two to four times higher than the policy deductible. The level of discretionary authority offered by the insurer typically will be high enough to cover seventy-five to eighty percent of the insured's portfolio. Buyers who require large credit limits (or who are in difficult markets where the DCL cannot be used) are underwritten by the insurance company. For credit limits underwritten by the insurer, the insured is required to provide supporting documentation on the buyer to the insurance company (typically including credit reports, trade references, and, for limits in excess of $100,000, financial statements).

Excess of loss underwriters in the United States include the Export-Import Bank of the United States (Ex-Im Bank), FCIA Management Company, Houston Casualty Company, QBE, and American International Group (AIG). Excess of loss underwriting is also attractive to all types of companies. Companies less experienced in credit evaluation find that this structure helps to better develop their credit department, or galvanize credit procedures across subsidiaries. The procedures endorsed into the insurance policies for using the DCL are generally similar to the credit evaluation procedures found in most credit departments. Because of this, many clients prefer excess of loss coverage, as it allows them to retain much of their credit function and extend insured credit lines simply by following their internal credit procedures.

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