China’s credit insurance market: main differences between domestic and international credit insurance

Credit insurance is a category of non-life insurance products covering the insured from economic losses due to the inability or refusal of a third party to pay an invoice under the terms of a contract. However, it does not replace the standard precautionary measures a company is supposed to adopt when it comes to trade goods or services both domestically and overseas. China’s credit insurance market is still underdeveloped compared to its huge potential. In 2020, China’s credit insurance premium income was slightly over 20.4 billion RMB, vaunting a 5% increase compared to the previous year. Meanwhile, credit insurance claims expenses touched 14 billion RMB, 27% more than recorded in 2019. However, as China gradually opens the door of its financial market, new players will be willing to claim their piece of the cake and contribute to make the cake bigger.

Data source: National Bureau of Statistics, designed by Asian-Risks, China’s credit insurance premium income between 2015 and 2020

In this article we will analyze the main differences between domestic credit insurance and export credit insurance in China.

Domestic credit insurance policies in China

China’s credit insurance market just accounts for a small share of the overall non-life insurance market due to a lacking legal framework which discourages financial entities from entering this business. General trade credit insurance, sales credit insurance, loan credit insurance and personal loan credit insurance are the main policies covering business activities within the Chinese borders.

Most popular products on China’s credit insurance market

General trade credit insurance

Under a general trade credit insurance, the insurer gets liable for the economic loss suffered by the insured due to buyer’s insolvency or legal equivalent. The insurance company will estimate the total amount to transfer to its client based on the value indicated on the trade contract signed by the two parties.

Currently, China Pacific Insurance Company (CPIC) offers a general trade insurance credit policy applicable to enterprises based in the People’s Republic of China and engaged in the sale of goods and services, which protects from losses within a year from the starting date of the coverage. Beyond compensating the uncollected sum, CPIC supports the insured in improving its risk management system and evaluating its main 10 buyers’ risk.

Sales credit insurance

Such insurance policy is meant to provide a credit guarantee on deferred payments, thus protecting the insured’s business performance as well as ensuring the stability of its cash flow.

CPIC offers a credit sales insurance policy named “Domestic Specific Business Contract Credit Insurance”, covering the risk arising from buyer’s bankruptcy or insolvency, or the breach of its payment obligations under the contract or its failure to pay within the grace period stipulated in the policy. The end date of such insurance solution does not exceed 3 years from its start. During such period, the insured will be able to set more flexible payment terms with its suppliers, thereby becoming more competitive on the market.

Loan credit insurance

Through a loan credit insurance, the insurer guarantees the loan contract between the financial institution and the enterprise to mitigate credit risk. In this way, the lender can obtain its compensation in the case that the borrower is unable to return the loan, thereby protecting bank credit funds.

Ping’An provides a simple and quick loan credit insurance solution which does not require neither mortgage nor other guarantees. However, applicants should be based in China for more than 3 years, have an open credit line of less than 6 months, and boast an annual credit sales scale of more than 30 million (except for companies in the real estate industry).

Personal loan credit insurance

Such insurance instrument is similar to the one previously mentioned. In this case, the borrower is a natural person, hence, since individuals present different risks from corporate entities, the insurer usually conducts a more comprehensive investigation of the borrower’s creditworthiness and intentions. Moreover, it would be better providing a counter-guarantee to have a faster compensation.

Foreign export credit insurance

Export credit insurance shields an exporter against the risk of possible economic losses due to buyer’s insolvency or inability to pay. Generally, such kind of policy covers both commercial and political risks. China’s export credit insurance products usually include short-term policies (up to 1 year) and mid-to-long solutions (between 1 and 5 years).

Short-term export credit insurance

This category includes the most popular and relatively standardized export credit insurance instruments in China. Usually, such kind of policies cover a period of no more than 1 year, and they tend to refund up to 90% of the loss resulted from either commercial or political risks.

CPIC provides clients with a short-term export credit insurance solution which, beyond compensating the uncollected sum, supports the insured in improving its risk management system and evaluating its main 10 buyers’ risk. Moreover, the company offers an export insurance product designed to meet the needs of small and medium enterprises. Such policy only requires basic claim documents such as contract, invoice, bill of lading and customs declaration. It does not need to apply for limits one by one: in fact, the insured will get a one-year coverage just by filling a simple application.

Mid-to-long-term export credit insurance

Medium- and long-term export credit insurance is designed to cover trade in complete sets of production equipment for factories or mines, large-scale transportation vehicles such as ships and aircraft, overseas engineering contracting and special technology transfer. Due to the inherent characteristics of such projects, such insurance products tend to be tailored on the client’s needs.

Euler Hermes, Atradius and Coface dominate the global credit insurance market, holding 35%, 25% and 20% of the whole industry respectively. Instead, SINOSURE is one of the main players in China’s credit insurance market, especially for what regards export credit insurance policies. China Export and Credit Insurance Corporation, known as SINOSURE, is a Chinese State-Owned insurance company whose aim is fostering local export-oriented enterprises by mitigating risk related to international trade. Its mid-to-long export credit insurance solutions vaunt a tenor of up to 15 years. Such typology of guarantees includes Export Buyer’s Credit Insurance, Export Supplier’s Credit Insurance, Export Deferred Payment Refinancing Insurance, as well as Overseas Lease Insurance for both business and financial entities. Instead, the Overseas Lease Insurance is a special category of long-term credit insurance instruments meant to shield investors and financial institutions from economic losses due to political risks such as expropriation, exchange restrictions, war, riots, or non-compliant payments occurred in the recipient country.

Source: SINOSURE Official Website, designed by Asian-Risks, mechanism underpinning SINOSURE’s Export Deferred Payment Refinancing Insurance

Asian Risks Management Services Limited (ARMS) is an international consultant advising clients on insurable risks. Independent from any insurance providers, ARMS act to the best of our clients.

Contact Asian-Risks to find your ideal credit insurance solution in China.