The risk of default and credit insurance

The risk insured within credit insurance qualifies as a risk in evolution, which requires constant supervision from both the insurer and the insured. To this end, the insured is bound to notify the insurer of any late payment or extension of the date of payment. The risk of default can originate in the insolvency, insolvability or even bad faith of the debtor, which does not honour his obligation to pay at the due date or within a certain term of maturity. The failure to pay a debt when due does not constitute a loss in itself and is considered as merely incidental to the obligation since it does not change the amount of the claim by itself. Nevertheless, the amount of the claim non-paid when due no longer corresponds to its face value because it suffers a depreciation, a loss of value, which depends upon the conduct of the recovery procedure and the erosion of the payment currency during this period, seen as factors that influence the economic resilience of the parties. The damage incurred by the creditor is the result of a financial imbalance because, even if he can appeal for the integral recovery of the claim, with default interest, he is forced to use his own funds, which generates a liquidity crisis and a damage which, in this case, becomes permanent. The downstream insurance is the only form of credit insurance which removes, for the creditor, the credit risk. Upon expiry of the payment term, the downstream insurer intervenes immediately so that all debt recovery costs and disadvantages of the late payment are borne by the insurer, who subrogates himself to the rights of the paid creditor.