Week 7 Crime Credit and Surety

Question 1

How can Money and property be stolen?

Answer 1

1. People external to the organisation (break -ins, ‘smash and grabs’ raids, shoplifting, etc – an outside job).
2. People internal to the organisation (employees, directors – and ‘inside’ job
3. Collision between 1 and 2

Question 2

Traditional Crime coverages? hint 3

Answer 2

1. theft Insurance
2. Money insurance
3. Fidelity (guarantee) insurance - internal criminal acts

Question 3

Theft Insurance

Answer 3

• A person is guilty of theft if he dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it UK (UK definition).
• So cover may be restricted to theft involving forcible and violent entry to the premises for some risks.
• Insurance may also cover ‘hold up’ (robbery) and damage to the building in the course of theft.

Question 4

What is the percentage of business lose due to theft

Answer 4

10%

Question 5

Theft insurance

Answer 5

separate figures for
1. stock
2. Business equipment and other contents

the sum insured for stock may be subdivided if there are different types of stock, some of which is more attractive to thieves.

Question 6

Theft rating factors

Answer 6

1. Type of property Insured
2. Location of the risk
3. Construction of the premises
4. Occupancy of the premises
5. Loss history.

Question 7

Money insurance

Answer 7

• can be insured separately (now more rarely)
• cover normally on an ‘all risks’ basis
• Different limits for types of loss, e.g., loss of crossed cheques, money in transit, money kept in a safe, money left on the premises out of business hours.

Question 8

what is a fidelity risk

Answer 8

this is the theft of money or goods by employees in the course of their employment.

• In many countries, this is a greater risk than ‘external’ theft. In the USA 57% of theft is committed by insiders, or insiders + outsiders.
• It often takes the form of hidden, long-term fraud or embezzlement .

Question 9

What the two main mechanisms to cover fidelity risk

Answer 9

1. Insurance
2. A surety bond (or guarantee)

Surety Bond
- Contract where one person (the surety, or guarantor) guarantees the actions of another.
- A very ancient practice, going back to 2,750 B.C
- Originally, all guarantees were private – the surety or guarantor had to be a human being.
- In the mid-19th Century corporate securities were allowed for the first time, so insurance companies (and banks) started to act as guarantors.
- Nowadays the ‘fidelity’ risk is usually covered by insurance, even though the contract may still be called a ‘fidelity bond’ , honesty bond or fidelity guarantee.
- True surety bonds are still very common in other areas.

• It is the employee who goes to the surety/ guarantee to seek protection.
• Contract of guarantee is three-way contract.
• Could be an insurance company.
• Note surety could be an insurance company.

Question 10

What is credit insurance?

Answer 10

• Indemnifies against buyer non-payment. Protects seller from risk of buyer non-payment.
• Non-payment can occur due to commercial or political risks.
• Commercial risks covered are buyer insolvency and extended late payment – the failure to pay within a set number of days of the due date. Extended late payments constitute protracted default.
  Political risks – involves non-payment on an export contract or project due to actions by an importer’s local government. These may include:
• Intervention to prevent the transfer of payment.
• Cancellation of license
• Acts of war or civil conflict or the local governments enactment of laws or other measures.
  Short-term political risks are also cover buy credit insurance.

Question 11

importance of credit insurance

Answer 11

1. important instrument for coping with the risks of late payment and failure to pay.
2. transfers payment risk to insurers, whose credit expertise, diversification and financial strength enable them to assume these risks
3. provides insured companies with access to professional credit risk expertise and related advice.
4. it enables insureds to extend credit to customers rather than requiring cash payment or security instrument like letters of credit
5. it can prevent insureds from suffering liquidity strains or insolvency.

Question 12

credit insurance benefits?

Answer 12

benefits a country’s economy
-supports domestic and international commerce by facilitating transactions that would otherwise have been too risky.
- Also enhances economic stability by absorbing some of the losses that policyholders suffer.
-

Question 13

Credit insurers risk management

Answer 13

• ensures transparency of risks covered and to take all necessary measures to keep aggregate risk in line with the company’s equity and risk tolerance.

Question 14

What are the ways of managing risk in credit risk insurance

Answer 14

Property policy design is an important precondition for managing risk in credit risk insurance.

self-retention, co-insurance, limit setting, confining covers to short tenors and policyholder reporting requirements all help to contain risk

Question 15

Risk Management tools in credit insurance

Answer 15

• Risk information tools and models that improve the transparency of exposures and support underwriting.
• “key performance indicators” KPIs to identify business trends and support decisions on risk capacity and policy provisions and limits.
• Control, industry and single name limits to control peak risks.
• Dynamic management of individual and portfolio limits, perhaps the most critical credit insurance risk management tool and
• Reinsurance and risk securitization to transfer risks that the credit insurers is unwilling or unable to carry on its own books.

Question 16

Risk management by credit insurers entails

Answer 16

sound policy design, risk monitoring, setting and managing risk limits and risk transfer.

tools that credit insurers mitigate risk also benefit their insureds.
- credit insurers - often discern the risk to a country, industry or buyer. Notifying the policyholder and taking early action can limit losses.

Question 17

Credit Insurers

Answer 17

employ sophisticated portfolio tools that account for risk correlations and costs and incorporate forward- looking indicators like expected default rates and risk ratings as well as compensation for capital costs.

Question 18

Dynamic limit management in response to event risk and credit crises

Answer 18

the credit insurers ability to set and manage credit limits give it a degree of control over its risk exposures that distinguishes credit insurance from other kinds of insurance and from many other credit instruments.

Question 19

Reinsurance

Answer 19

• risk management tool - risk transfer
  defaults occur for a variety of reasons - when credit insurers are confronted with such events - reinsurance helps to smooth the loss impact.

Re-insurance lowers the cost of capital of credit insurers by reducing their earnings volatility.

Question 20

What are the two types of reinsurance

Answer 20

proportional and non-proportional

• Proportional reinsurance treaty: the direct insurer and the reinsurer share premiums and the reinsurer share premiums and losses at a contractually defined ratio .
• A non-proportional reinsurance treaty sets an amount up to which the direct insurer will pay all losses. The reinsurer pays all or a predetermined percentage of looses above this amount, up to a cover limit.

Each type of reinsurance serves a particular role and provides access to capital that might not otherwise have been available.

Question 21

Advantage of reinsurance

Answer 21

indemnity-based - means that it poses no basis risk

credit default swaps - creates basis risk. Hedging tools therefore leave the insurer exposed to the risk that the losses it incurs will not be covered.