The IRDAI on Wednesday proposed a regulatory framework to facilitate general insurance companies to offer trade credit insurance covers to suppliers as well as licensed banks and other financial institutions to help businesses manage country risk.
The draft guidelines are for all insurers transacting general insurance business, registered under the Insurance Act, 1938. However, ECGC Ltd would be exempted.
Trade credit insurance protects businesses against the risk of non-payment for goods and services by buyers. It usually covers a portfolio of buyers and indemnifies an agreed percentage of an invoice or invoices that remain unpaid as a result of protracted default, insolvency / bankruptcy.
The government is keen on trade credit insurance that will to enable general insurance companies to offer trade credit insurance with customised covers to improve businesses for the SMEs and MSMEs, considering the evolving insurance risk needs of these sectors.
Based on the recommendations of a working group on revisiting guidelines on trade credit insurance, the Insurance Regulatory and Development Authority of India (IRDAI) has now come up with draft guidelines on trade credit insurance.
The draft said it would also "facilitate general insurance companies to offer trade credit insurance covers to suppliers as well as licensed banks and other financial institutions to help businesses manage country risk, open up access to new markets and to manage non-payment risk associated with trade financing portfolio".
It further said the "scope of cover under trade credit insurance policy shall be the credit risk that has a direct link with an underlying trade transaction — the delivery of goods or services".
If no such direct link exists, the outstanding amount is not insurable under a trade credit insurance policy, the draft said, and added the cover may include but not be limited to commercial risks and political risks.
Political risks cover would be available only in case of buyers outside India and in respect of those countries agreed upon at the proposal stage, said the draft on which IRDAI has invited comments from stakeholders till April 28.
Political risks include the following.
-Operation of a law or of an order, decree or regulation having the force of law which, in circumstances outside the control of the insured and/or the buyer, prevents, restricts or controls the transfer of payment from the buyer’s country to India;
-Occurrence of war between the buyer’s country and India;
-Occurrence of war, hostilities, civil war, rebellion, revolution, insurrection or other disturbances in the buyer’s country;
-Imposition of any law or order, decree or regulation having the force of law which, in circumstances outside the control of the insured and/or of the buyer, prevents the import of the goods into the buyer’s country;
-Cancellation, in circumstances outside the control of the insured and/or of the buyer, of a previously issued and currently valid authority to import the goods;
-Incurring, in respect of goods shipped from India, of any additional handling, transport or insurance charges which are occasioned by interruption or diversion of voyage outside India and which is impracticable to be recovered from the buyer;