XXV Edition

1-2 December 2016"

Could Domestic Trade Credit Insurance Contracts be an Effective Collateral for Banks? A Quantitative Study on the Italian Market

Bazzana Flavio, University of Trento
De Laurentis Giacomo, Bocconi University
Pisani Raoul, University of Trento
Trinca Colonel Renata, Bocconi University

Domestic credit insurance contract is a policy which covers the risk of non-payment of a future commercial credit as result of failure to pay within agreed terms and conditions (protracted default) or insolvency of the buyer. In order to evaluate the level of financial protection offered by trade credit policies, we collected a database of contracts issued by a number of Italian insurance companies which account for 80%-85% of Italian market. According to our results on the indeminsations paid by the insurance companies examined, we identified the financial protection level of the policy ranges between the 64% to 69% according to the different discount rates used to evaluate the cash flows in the time (pre-indemnisation, indemnisation and post indemnisation payments). This means a correspondent LGD ranging from 31% to 36% which is much lower than the one (45%) identified by the regulation. This leads us to believe that there is room for using the policy as a risk credit mitigant, immediately for banks using the IRBA advanced approach, and with some changes in the regulation for the others too.

Area: Insurance

Keywords: credit insurance; LGD; insurance companies

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