Post Loss Funding Credit Insurance Facility.
As I understand it, this insurance product can be described as follows:
It is a loan dressed as insurance.
A company suffers a substantial bad debt loss for which it has made no
After suffering the loss it takes out an insurance policy to (a) cover the
loss already suffered and (b) cover some future credit risks which are very
unlikely to occur.
The insurance company then immediately pays the insured in full for the
loss suffered. Thus the company does not have to suffer the loss, as a deduction
from profits nor as a negative cash flow, all in one year.
The company in turn pays premiums to the insurance company over, say, five
years. The total of such premiums covers (a) the amount of the loss, (b)
interest and (c) a very small premium for the risk of loss in respect of the
'future credit risks' insured.
The premiums are written off against profit when paid, as usual.
Hence the company repairs both its cash flow and its profit profile.
Naturally if the company is 'weak' the insurer may require some security
to cover the premiums to be paid.
order to make this 'loan' look like a genuine insurance policy some future risks
have to be rolled into the package. In order to do this cheaply the company
would choose, for example, the risk of a loss exceeding a very high figure on
only its AA or better rated counterparts.