Chapter 12 - Single risk business

Summary

The private political risk insurance market started developing in the early 1970s when international trade evolved from its historical bilateral structure into the multilateral format that led to the globalization we see today.

In those early days, import-export contracts with developing countries were mainly decided at the government level, and payments of such flows were secured by sovereign guarantees. This is why trade operators were said to be facing mainly ‘political’ risks.

With the trend towards privatization around the world in the 1980s and 1990s, buyers and sellers of traded goods increasingly were private (non-government) companies, and international trade rules were liberalized to the extent that government export subsidies became widely prohibited in the multilateral agreements involving private companies.

This is why trade operators who had historically sought insurance protection against their ‘political’ risks also started seeking protection against commercial payment default by private buyers. The insurance market thus started to combine these political and commercial cover in the mid-1990s, and thus the term ‘single risk’ insurance was coined by most of the insurance providers.

A FEW WORDS ABOUT TERMINOLOGY

Why ‘single risk’ and what does it mean?

The ‘single risk’ concept has been developed as a way to differentiate from the short term whole turnover (or portfolio) business that historically represented the bulk of activity of the credit insurance market. The diversity of international trade flows calls for such a differentiation.

On the one hand, sales of consumption goods occur by way of numerous regular deliveries to a large variety of buyers within the same country or throughout many countries. There is no specific commercial contract between the seller and the buyer for each and every delivery but rather trade is usually conducted pursuant to purchase orders sent by the buyer to the insured. Payment terms are agreed between the parties, generally on relatively short credit terms (ranging from cashon- delivery up to one year credit). Short term whole turnover (or portfolio) insurance has been designed to cater to these trade flows specifically. On the other hand, sales of capital equipment or building/ infrastructure construction or commodity trading are operated in a different way, frequently with commercial contracts written on a caseby- case basis, and exhibiting longer payment terms (tenors), and bank financing or other securities or collateral.