Take it from Willy Loman’s wife – attention must be paid to aggregate levels of coverage to avoid nasty surprises at time of claim on credit insurance

By Rob Downey

"…attention must be paid!" Linda Loman says in summarizing the torment of her husband just before the anguished climax of American playwright, Arthur Miller’s "Death of a Salesman". And so it must. These days, we may all be feeling a bit like Miller’s hapless protagonist, Willy Loman. We are all "human being(s)… and terrible things are happening" to us.

Attention must be paid to credit insurance coverage matters more prosaic than poetic, to a topic more important than it is interesting, even to users of credit insurance. In this post I intend to discuss a specific feature of trade credit insurance: the Aggregate Limit of Liability (LOL). In coming blog posts, I will take on Discretionary Credit Limits, Deductibles, Special Buyer Limits, Rates, and Coverage Percentages.

All export credit insurance policies contain an aggregate LOL, not to be confused with the text messaging acronym "Laugh Out Loud". This limit represents the maximum amount the insurer will pay the insured for losses during the policy period. The aggregate LOL is the ceiling of coverage (much as the deductible is the coverage floor).

A company should periodically monitor its aggregate LOL to see that it is sufficient. The aggregate should be:

• Larger than any single buyer exposure; larger than any Special Buyer Credit Limit (SBCL)
• Larger than any single country exposure
• Larger than any homogeneous regional exposure, i.e. one with similar local, political or commercial risks, for example the Middle East, the Caribbean, Latin America, India-Pakistan, Australia-New Zealand
• Equal to or larger than all outstanding export receivables if using the policy for financing. The aggregate should cover all receivables in order to have them eligible for financing

But attention must be paid. Up until September of 2008, IRC was notifying clients and prospects as follows:

The aggregate limit of liability may be changed relatively easily upon request, at no cost to the insured, so long as the request can be justified by the actual exposure. The aggregate limit is not linked to other policy limits such as discretionary limits or deductible – changing it does not typically affect other policy parameters. Note that the aggregate LOL cannot exceed a level of exposure greater than that supportable by insured's financial condition.

Now, in 2009, we talk about the aggregate LOL with more restraint. To wit:

All insurers this year are watching their insureds’ aggregate LOLs more closely. No one is careless of its level nor unconcerned with the active usage made beneath it, because aggregate levels are a key component of the insurers’ reinsurance availability and cost. Expect to see insurers seek to “take the air out” of your aggregate LOL and reduce it to the lowest levels possible. All insurers are taking steps to ensure that insureds need and use the aggregate levels made available to them. This year, of a sudden, aggregate levels are a key consideration in the pricing of and in the design of your credit insurance coverage.

There are two particular, and particularly unattractive, aggregate guidelines that insurers are fonder of this year than in the past. Aggregates that apply only to Discretionary Credit Limits (DCLs), the so-called Discretionary Aggregate, are increasingly seen in first quotations from some of our providers. The purpose of this sub-aggregate is to define a maximum amount of total claims that will be paid upon losses, which accrue from failures of the seller’s discretion. That is, losses derived from defaults by buyers that were approved for coverage not in advance with a limit set by the underwriters, but by the insured’s adherence to the policy discretionary (DCL) guidelines and in conformance with the insured’s own exercise of credit judgement.

More common as well is an attempt by insurers of some types of multi-buyer exposure to define the policy aggregate as a multiple of premiums paid. Several of the European-style or "ground-up" (zero deductible) insurers like to offer an aggregate coverage amount that may be, for example, equal to forty times the premium dollars paid during the policy year.

The problems with both of these limiting twists on the traditional understanding of aggregate is obvious, i.e., they create an additional monitoring chore for the client, and they create day-to-day uncertainty as to the precise amount of maximum coverage an insured client has available to them. We do not like either of these variations, but we do not always succeed, especially on smaller policies, in preventing their imposition into coverage.

All of the seventeen insurers with whom International Risk Consultants place business are paying claims these days at near-record levels. From the insured’s perspective, however, the insurers cannot be relied upon to speak about aggregate levels in your interest.

Attention must be paid, starting with the aggregate limit of liability, if surprises are to be avoided at time of claim. That is what your broker is for.

(Rob Downey is one of the founding partners of International Risk Consultants, Inc. (IRC) www.irc-group.com – a globally-integrated trade-finance and credit insurance specialty brokerage, which serves as the operating member of ICBA for Mexico, Brazil, India, China and the U.S.)