This is the most common arrangement used by Banks and Financial Institutions in financing trade receivables to enhance the collateral value of accounts receivable used to secure trade, working capital or asset-based loans.

 

The Bank gets assigned as a 'Loss Payee' on a Trade Credit Insurance Policy availed by the Corporate with either of 2 options :

 

Option 1: Standard Loss Payee Assignment :

This entitles the bank to only receive all claim monies in the event of any insured trade receivable assigned to the bank goes into default. The bank does not have a right to negotiate with the Insurer on any aspect of claim filing, documentation and processing which continues to be the policy obligation of the Corporate Policy Holder. 

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This assignment can either be on 'Sole Loss Payee Basis' or 'Pari-Passu Loss Payee Basis' (involving multiple banks), although 'Sole Payee Basis' is generally recommended wherein a dedicated assignment for respective debtor(s) is done to specific trade finance banks on exclusive basis. 

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Option 2: Trade Finance Loss Payee Assignment :

This entitles the bank to receive all claim monies as under the Standard Loss Payee Assignment and additionally entitles to assume full control on all claim aspects and directly negotiate with the Insurance Company for any claim filing, documentation and claim finalization, including payment of any outstanding premiums, in the event the Corporate policy holder goes insolvent or defunct. The Bank is also granted access to an Insured's policy information and approved buyer credit limits of all assigned debtors.

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This Credit Insurance Policy assignment tool helps the Banks to mitigate excess risk concentrations in an accounts receivable portfolio or include previously excluded trade receivables in the borrowing base.

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