Financial Insurance

Abstract

This paper provides information related to the financial insurance market and also focuses on the export credits in Asia. The purpose is to make people aware of how financial risks can be insured.

After a brief presentation of the types of financial risks, the paper continues with the most common types of financial insurance. In addition, the situation of the Romanian market and the types of contracts that can be concluded are also detailed.

There is also presented a case study about export credits in Asia, specifically about HKECIC, a company from Hong Kong that offers support to export companies from this country by assuring against commercial risks, political risks, currency risks.

Even though the financial insurance is relatively new, it is without a doubt a characteristic of the contemporary business world. That is why it is important for every trader to know that under certain conditions he can minimize his losses by contracting this type of insurance.

Introduction

Nowadays, everything is surrounded by uncertainty and the only constant is change. It is obvious then that the commercial activity is exposed to higher and higher risks. It is very common in the present to see companies going bankrupt because they are not able to pay their debts as a result of the fact that they have at their turn to receive money from their buyers. It is vital for a company to be able to receive future revenues from current transactions in order to maintain its solvency.

Sometimes, the large value and the long life cycle of the goods involved in economic transactions make it impossible to pay the whole amount at once, so the necessity of a credit becomes clear. Credit involves trust from the parties involved, but a protection is also needed in case of not receiving the lent money. “The insurance regarding the commercial activity, which is influenced by the economic conjuncture and the possibility of the buyer to pay the obligations at the due date, are known as financial and political risks insurance.” Because of their specificity, these types of insurances are dealt by special companies.

Chapter 1. Types of financial risks

There are several types of financial risks and these can be grouped in:

• commercial risks

• natural calamities risks or force majeure

• political risks

• currency risks

The first type of risk, the commercial one, appears when a buyer is not able anymore to pay his debts on time due to the worsening of his financial situation. This happens either because of long-term actions or because of a single event that has terrible consequences. Besides dealing with insolvency, this type of risk also covers the bad faith of the buyer, when he has inappropriate claims.

The natural calamities risks or force majeure appears when the buyer cannot fulfill his obligation due to several events that may disturb his activity, such as: floods, fire, hurricanes, earthquakes, volcanic eruptions.

The political risk takes place whenever the society is faced with events like war, revolution, civil war, riot, strike, this affecting externally the economic activity. Besides these, political risks can be considered also some measures taken by authorities that have a negative impact on economic agents, such as: decrease in exports, limitation of currency transfer, and also the lack of payment by public debtors towards economic agents.

However, this type of risk is not encountered very often since it appears only in insuring export credits. The risk can emerge due to several facts: difficulties, delays and even impossibility of transferring the money owed from the importer’s country to the one of the exporter’s because of some governmental actions or legislation, regulations concerning licenses, wars, civil wars or similar events.

The currency risk emerges when the seller and the buyer use two different currencies. Due to the changing conditions of the market, from the moment of signing the contract until the moment of actual payment the rate between the two currencies changes, this implying lose for one of the parties.

Currency exchange risk appears when the rate of the currency of the exporter is not fixed to the one of the importer, this resulting into a gain or a loss for the exporter.

Another kind of currency risk is represented by the risk of increasing manufacturing costs which appears due to the inflation on the market of the exporter. The risk increases along with the increase in the manufacturing cycle of the product.

The risk of a change in the interest rate can be encountered when a fixed interest rate contract is signed and, therefore, the interest rate on the market can be higher than the one stipulated in the contract, thus making the exporter or the creditor bank lose money. There are different solutions to this problem: state support for the exporter, stabilization of the interest rate perceived by the banks to their external customers.