Insights on the credit insurance market in China
Credit insurance (信用保险) is a type of insurance where the insurer is liable for the economic loss suffered from failed contracts or debt insolvency. It provides a guarantee that your insurer will pay up when your customer doesn’t. For example, if your customer declares bankruptcy after you have shipped goods to them but before they have paid you, the credit insurance will cover your loss. In this article we will go over the credit insurance market in China.
Main types of credit insurance products in China
The market dynamics of credit insurance in China
The world saw a continuation in the upward trend in China’s export & import in the last decade. In 2020, total exports and imports reached record highs and the international market share was the highest ever. The booming export and import in China lead to more business opportunities for credit insurance. The credit insurance market in China is underdeveloped because of its special business model in terms of marketing and operation. The business scale of credit insurance has always been relatively small compared to the entire non-life insurance industry.
The main reason is that only large companies like Ping An, PICC, and Dadi Insurance have entered the credit insurance market, many other insurance companies are short of awareness and understanding of the credit insurance business. The overseas investment insurance market has stable growth. However, the insured amount of short-term export credit insurance was halved as a direct result of the decline in exports due to the US-China trade war.
Main players in China’s credit insurance market
The main seller of trade credit insurance: China Export & Credit Insurance Corporation (SINOSURE) is a state-funded and policy-oriented insurance company established and supported by the state in 2001 to promote China’s foreign economic and trade development and cooperation. As an independent legal group, it provides principal products including medium and long-term export credit insurance, short-term export credit insurance, overseas investment insurance, and domestic trade credit insurance. By providing insurance for foreign trade and investment cooperation, Sinosure (China Export and Credit Insurance Corporation) promotes the development of economics and trade and focuses on supporting the export of goods, technology, and services.
Focus on enterprise credit insurance: CPIC has a credit sales insurance product named Domestic Specific business contract credit insurance. This insurance product is for loss of collections due to the buyer’s bankruptcy, inability to pay debts, or long-term default.
They have 4 kinds of business credit insurance in total:
- Export credit insurance for small trade enterprises targets export collection risk.
- Credit insurance for commercial contracts covers the loss of receivables due to the buyer’s bankruptcy, insolvency, or prolonged default.
- Short-term export credit insurance for trade companies targets the risks of bad debt or delinquency to the buyers
- Short-term domestic trade credit insurance targets possible bad debts or defaults of buyers.
An international leading brand in the market: As a leading player, Coface offers a comprehensive line of credit insurance to protect clients against potential non-payment by their customers, with cover provided in approximately 200 countries. Once the payment arrears are ascertained, Coface steps in to collect the receivable from clients. The company implements proven collection techniques to maximize the chances for successful collection.
The main credit insurance solutions of Coface:
TradeLiner means continuous prevention and protection from the risk of non-payment of sales in domestic and export markets. By purchasing the product, clients can ensure consumer goods, services, and operations linked to international trade.
The source of risk includes:
• Commercial: non-payment by customers.
• Political: non-payment due to customers’ government.
• Linked to a natural disaster.
TopLiner is designed for situations where, for a given buyer, the insured company has received a guarantee with an amount that is less than that requested or no guarantee at all. The price depends on the risk assessment and the amount and duration of the requested cover.
Single Risk is a solution to companies and financial institutions exposed to commercial and political risks abroad. Single Risk revolves around five innovative contracts:
• Political Risk guarantee
• Export & Domestic guarantee
• Import guarantee
• Financing guarantee
• Investment guarantee
Domestic and export credit insurance providers: AIG & Ping An
AIG focuses on domestic trade credit insurance whereby receivables arising from underwriting sales of credit between the insured and its buyers, including the buyer’s bankruptcy or insolvency and long-term default. They have several unique selling points such as fast and quality service. They also have easy access to loan services due to their high financial credibility over the years and strong financial portfolio. AIG has a strong underwriting capacity, adequate underwriting limits, extensive international reinsurance support, and more than 30 years of credit risk underwriting experience.
PingAn mainly provides export credit insurance with simple procedures, flexible terms, and fast approvals. The company must be established for at least 2 years, has a bill of nearly half a year that is 1.2 million at least, has a value-added tax invoice and two years of annual statements, the most recent monthly statement, and the most recent six months of invoices; more importantly, applying for credit insurance. The loan of a corporate applicant in the past three months cannot be overdue, and the corporate debt ratio cannot exceed 60-70%.
Both companies provide fast claim services and a clear insurance process. AIG has more experience in domestic credit insurance in China and PingAn focuses more on export credit insurance. Moreover, AIG is using the “Excess of Loss” model of underwriting and is the only insurance company on the market that provides non-cancellable credit limits. As for PingAn, credit is presently a small share of its business.
Driver and obstacles of China’s credit insurance market
Drivers: In recent years, due to financial difficulties and management problems, longer payment terms have been a trend among Chinese companies along with that is the credit risk which is also on high alert. Therefore, credit insurance is becoming a solution for companies that want to hedge this risk in B2B business activities.
Obstacles: In recent years, with the development of the insurance market, some parts of the Interim Measures for the Supervision of Credit Guarantee Insurance Business can no longer fully adapt to the new situation and issues. To further strengthen the supervision of credit insurance business, regulate business practices and prevent and mitigate risks, the CBIRC has issued the “The new Regulation of Credit Insurance and Guarantee Insurance Business” in 2020.
What challenges to expect from the credit insurance market in China
Single business entity: Because of the high market access threshold, there is only one domestic export credit insurance agency (SINOSURE), and no more than five domestic trade credit insurance agencies, and fewer agencies operating other credit insurance products.
Fraud risk: The growth in fraudulent claim attempts makes credit insurance difficult to distinguish real cases from fraud. For example, some firms might come to their insurer and fabricate some conditions for compensation.
Single insurance products: The main focus of the market is on export credit insurance and few products cover credit risk due to various forms of credit business, and even fewer products for investment and consumer sectors.
Lack of integration with the extended ecosystem: Chinese credit insurance companies could be more effectively integrated. This includes receivables finance, new trade platforms, supply chain, and technologies.
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