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 provision.

·       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.

In 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.

Ron Wells