After this year’s first six months, firms which are still selling trade credit insurances have recorded written gross premiums of little over six million lei and payments of 12 million lei on this segment. The volume of written gross premiums shows a drastic drop in comparison with the beginning of the economic crisis, when hundreds of millions of lei were gained from selling such insurances. In fact, trade credit insurance, which has become a completely unprofitable product once the number of arrears exploded, is a product on the verge of extinction.
Only Garanta and, to a lesser extent, Groupama are still active on this market. In fact, financial results show that nobody had to gain from the explosion of trade credit insurances. In the first place, companies that sold such insurance policies had only a marginal profit or downright losses, given the ratio between such the sales of such policies and the indemnities paid in the last years. In the second place, natural persons who bought such policies and were put in a position to activate them (being unable to return the loan) are still in a delicate position. Such persons will automatically be registered at the Credit Bureau, so that the chances they can contract a loan in Romania in the future are next to zero.
A losing alternative
Insurance policies for loans are the least profitable insurance products, as the ratio between written gross premiums and payments demonstrates. It is even less profitable than the Civil Auto Liability (RCA) policy. If in the latter’s case, the rate of losses, which means the ratio between the paid gross indemnities and the collected gross premiums, was close to 100% mid-year, in the case of trade credit insurances, this index goes beyond 200%, which shows that payments are double than the written gross premiums. In fact, this product has never been profitable once the economic crisis began in 2009. 2010 was the last year when the rate of losses was under 100%, when this index amounted to 80%. Even so, if one adds marketing and provisioning expenses, the combined rate of losses goes above 100%, which proves that selling this policy was nothing else than a breakeven situation.
How trade credit insurance functions
The trade credit insurance is not an individual policy. Although banks have sold this product as an attachment to each loan individually, the contract was, in fact, thought out for portfolios of loans. In other words, this type of insurance does not function as a contract between the client and the bank or between the client and the insurance company, but as a contract between the bank and the insurance company. Even if the policy is paid for by the clients who contract a loan, the approximate cost being 4% of the entire loan, they have no control over it. The bank is the entity which decides if it sends the insurance company each case, in case arrears of over three months occur.
Moreover, even if the bank decides to activate the respective policy, the client will not automatically be off. His name will be recorded in the Credit Bureau’s database, which will drastically limit his access to future loans. Furthermore, the insurance company has the possibility of suing the client who has not paid his debt to recover the sum it has paid to the bank. Last, but not least, if the insurance policy covers only the sum of the loan (the principal), the client will have to pay the resulting difference until the whole sum of the loan is covered, including the interest. There are two available loan insurances. Some cover both the initial loan and the interest, while others only cover the amount of the principal.
During the economic boom period, almost all banks attached to consumer credits an insurance policy of this kind, which was usually emitted by companies affiliated to the bank which gave out the loan.
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