Credit Insurance
Credit Insurance: 8 technical terms explained – definition, synonyms and legal basis.
Deficiency Guarantee (Ausfallbürgschaft)
Synonyms: Ausfallbürgschaft
Under a deficiency guarantee, the creditor may only call on the guarantor once enforcement against the principal debtor has proven unsuccessful.
Concept
A deficiency guarantee is a special form of surety under which the guarantor is only obliged to pay the creditor once it has been established that the creditor was unable to fully enforce its claim against the principal debtor, despite enforcement action.
Distinction from a Direct (Solidary) Guarantee
Unlike a solidary guarantee, under which the guarantor is directly liable without any need to first pursue the principal debtor (waiver of the defense of prior recourse under § 771 BGB), liability under a deficiency guarantee is subsidiary and requires an actually established shortfall.
Practical Relevance
Deficiency guarantees are used, among other things, for publicly subsidized loans, such as those provided through guarantee banks or state support programs, as they significantly reduce the guarantor’s liability risk compared to a solidary guarantee.
Legal basis: DE: § 771 BGB
Credit Default Risk
Synonyms: Ausfallrisiko
Credit default risk is the risk that a debtor fails to meet its contractual payment obligations, in whole or in part.
Concept
Credit default risk refers to the danger that a debtor — such as a borrower, a bond issuer, or a trading counterparty — fails to meet its contractual payment obligations, in whole or in part.
Relevance for Credit Insurance
Credit default risk is the central insured peril in trade credit and export credit insurance, where insurers assume the risk of buyer insolvency in exchange for a premium. Premium calculation is based on ongoing credit assessment of the insured buyers.
Relevance for Investments
In an insurer’s investment portfolio, credit default risk — usually referred to there as spread or counterparty default risk — is also a material sub-risk quantified separately under Solvency II within the market risk module or the counterparty default risk module.
Export Credit Guarantee (Hermes Cover)
Synonyms: Hermesdeckung, Ausfuhrgewährleistung
Export credit guarantees are state-backed export credit guarantees provided by the Federal Republic of Germany to promote foreign trade, known as Hermes cover.
Concept
Export credit guarantees, commonly known as Hermes cover, are state-backed export credit guarantees through which the Federal Republic of Germany protects German exporters against economic and political risks in cross-border business.
Implementation
The federal government issues export credit guarantees through a mandated consortium; the operational business of processing applications and handling claims is carried out on a fiduciary basis by a private credit insurer acting on behalf of the federal government.
Subsidiarity Principle
Export credit guarantees are only granted where sufficient cover is not available on the private credit insurance market for the relevant export transaction. This subsidiarity principle ensures that state export credit guarantees complement, rather than compete with, the private market.
Guarantee Credit Line (Avalkredit)
Synonyms: Avalkredit
A guarantee credit line is a facility granted by a bank or surety insurer within which individual guarantees and bonds (avals) can be issued on behalf of a customer.
Concept
A guarantee credit line is a facility granted by a bank or a surety insurer within which individual guarantees and bonds (avals) can be issued on a customer’s behalf to third parties, without requiring a fresh credit assessment for each one.
How It Works
Within the agreed guarantee facility, the customer can flexibly draw on individual avals, such as advance payment, performance, or warranty bonds for different projects, as long as the total amount of outstanding avals does not exceed the agreed credit limit.
Relevance for Companies
For companies in construction and plant engineering, a guarantee credit line is an important financing instrument, as it allows them to provide the security required by project owners without tying up their own liquidity through cash collateral or deposits. Surety insurers offer tiered product variants, ranging from compact solutions for smaller guarantee needs to larger, individually negotiated facilities; ongoing management of individual bonds increasingly takes place through digital customer portals, where guarantee requests can be submitted, documents retrieved, and the status of outstanding bonds monitored at any time.
Guarantee Commission (Avalprovision)
Synonyms: Avalprovision
The guarantee commission is the fee a customer pays to a bank or surety insurer for assuming the risk of a guarantee or bond (aval).
Concept
The guarantee commission is the ongoing fee a customer pays to the issuing bank or surety insurer for assuming the default risk under a guarantee or bond. It is typically calculated as a percentage of the guaranteed amount per year.
Determination
The level of the guarantee commission depends on the customer’s creditworthiness, the type of bond (e.g., advance payment, performance, or warranty bond), and the term of the aval. Riskier guarantees and customers with weaker credit standing result in higher commission rates.
Distinction from Interest
Unlike interest on a cash loan, the guarantee commission does not compensate for the provision of capital but solely for the guarantor’s assumption of liability risk, since no actual loan amount is disbursed under an aval.
Guarantee Facility Limit (Avalrahmen)
Synonyms: Avalrahmen
The guarantee facility limit is the contractually agreed maximum amount up to which a surety insurer or bank will issue guarantees and bonds for a customer.
Concept
The guarantee facility limit refers to the contractually agreed maximum amount within which a bank or surety insurer is willing to issue guarantees and bonds on behalf of a customer. It is set based on a credit assessment of the customer and reviewed periodically.
Usage
Within the guarantee facility limit, the customer can flexibly draw on individual avals for different projects and project owners, without having to undergo a separate credit assessment for each bond. The total of all outstanding avals may not exceed the agreed limit.
Relevance for Corporate Financing
An adequately sized guarantee facility limit is of central importance, particularly for construction and plant engineering companies, since they regularly need to provide security to their clients, and without a sufficient facility their competitiveness in bidding would be constrained.
Credit Assessment (Bonitätsprüfung)
Synonyms: Bonitätsprüfung
Credit assessment is the systematic evaluation of a counterparty's ability to pay and forms the central underwriting basis of credit insurance.
Concept
Credit assessment is the systematic analysis of a counterparty’s ability and willingness to pay, in order to evaluate its default risk and set credit or payment limits on that basis.
Approach in Credit Insurance
In credit insurance, the insurer conducts an ongoing credit assessment for each buyer of the insured company, taking into account financial statement data, payment history, external rating information, and industry-specific risk factors, in order to set an individual credit limit for that buyer.
Ongoing Monitoring
Credit assessment is not a one-time exercise but a continuous process: credit insurers continuously monitor the creditworthiness of insured buyers and promptly adjust credit limits if paying ability deteriorates, which also serves insured companies as a valuable early warning system regarding their own customers. Many providers express the rating on a standardised scale (commonly 1, “excellent creditworthiness”, to 10, “insolvent”) and also offer this assessment and monitoring function as a standalone information product independent of a credit insurance policy, for instance to vet new suppliers or customers before entering into a contract.
Suretyship (Bürgschaft)
Synonyms: Bürgschaft, Guarantee
A suretyship is the civil law contract by which a surety undertakes to the creditor to answer for the performance of a third party's obligation.
Concept
Under Sections 765 et seq. of the German Civil Code (BGB), a suretyship is a contract by which the surety undertakes to the creditor of a third party to answer for the performance of that third party’s (the principal debtor’s) obligation should the debtor fail to meet it.
Accessoriness
A suretyship is strictly accessory: it presupposes a valid principal debt, is bound to it in scope and existence, and generally lapses when the principal debt is extinguished. This accessory nature distinguishes a suretyship from an abstract guarantee, which exists independently of the secured claim.
Relevance as the Basic Form of Credit Security
The suretyship forms the civil law foundation of numerous security instruments used in commerce, including the aval issued by banks and surety insurers, and is thus a core building block of surety and credit insurance.