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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


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Last Updated:  February 03, 2020 15:57 -0000