Credit Risk

Rich-monopoly-manWith the renewed tension between the US and China, well, lets’ face it, the World, on trade issues, it’s a good idea to look at a captive to help mitigate such risks. President Trump just announced $250 billion dollars in tariffs targeting Chinese products, on top of previous tariffs already announced. One could argue whether it’s a good policy or not, but the facts that there will be increased risks in international trade is a fact.

As countries ratchet up the rhetoric and retaliation, insurers are weighing how companies will deal with the pressure. Trade credit insurance protects companies from the risk that buyers will be unable to pay. If governments implement more tariffs, it could increase the cost of production and ultimately put stress on retailers and distributors to either raise prices on consumers or shrink profits. If the stress is enough to put the buyer out of business, the supplier would activate its trade credit insurance to get reimbursed for defaulted payments, for example.

As reported in Insurance Business America in June, the potential failure of an agreement on NAFTA also presents risks. If NAFTA fails or is dramatically renegotiated, companies will be forced to redraft their production models and their supply chains. That will take a lot of money, time and could significantly increase their credit risk.

Forward-thinking organizations with international exposure are now seeing the benefits of bringing their own captive insurance company into the equation as a way to control the risks. Thus, trade credit and political risk are joining the growing list of non-traditional lines that captive managers are now using to better leverage the benefits of their captive.  Structured many ways, using a mix of fronting and reinsurance, some of the benefits could be:

  • Diversification of the captive into trade credit risks, which are not historically correlated with property and casualty risks
  • Additional premium flow into the captive and resulting investment income
  • Non-cancelable trade credit insurance coverage
  • An additional set of experienced eyes on the credit risks that the customer is taking onto its balance sheet

Ultimately, trade credit insurance can help companies apply longer-term risk management strategies. However, the continuing trade war puts every part of the economy at risk, and any trade risk insurance can only help so much.

Thank you all very much, and I look forward to hearing from you.

Rich Smith
VCIA President

Tulip-mania

tulipsAccording to recent news reports, the sharp sell-off that gripped cryptocurrency markets this past Wednesday has extended into a second day, with major digital assets across the spectrum continuing to fall during trading on Thursday.  The slump was then exacerbated by a Business Insider report that Goldman Sachs has put plans to launch a bitcoin trading desk on hold for the foreseeable future. But really one only has to look to speculative bubbles throughout history not to be surprised by the news.

Back in the early 1600s there was another investment scheme that just couldn’t lose: tulips. Tulip mania was a period in the Dutch Golden Age during which contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels and then dramatically collapsed, and is generally considered the first recorded speculative bubble.  At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled crafts worker. As prices drastically collapsed over the course of a week, many tulip holders instantly went bankrupt.

I think cyber currencies will play an increasing role in our financial and economic system over the course of the next decade. However, a little caution may be in order before deciding to place your captive assets in such a vehicle! In November 2013 Nout Wellink, former president of the Dutch Central Bank, described Bitcoin as “worse than the tulip mania,” adding, “At least then you got a tulip, now you get nothing.”

Thank you all very much, and I look forward to hearing from you.

Rich Smith
VCIA President