Trade credit insurance, business credit insurance, export credit insurance, or credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy.
This insurance product is a type of property & casualty insurance, and should not be confused with such products as credit life or credit disability insurance,
which individuals obtain to protect against the risk of loss of income
needed to pay debts. Trade Credit Insurance can include a component of political risk insurance
which is offered by the same insurers to insure the risk of non-payment
by foreign buyers due to currency issues, political unrest,
expropriation etc.
This points to the major role trade credit insurance plays in facilitating international trade. Trade credit is offered by vendors to their customers as an alternative to prepayment or cash on delivery
terms, providing time for the customer to generate income from sales to
pay for the product or service. This requires the vendor to assume
non-payment risk. In a local or domestic situation as well as in an
export transaction, the risk increases when laws, customs communications
and customer's reputation are not fully understood. In addition to
increased risk of non-payment, international trade presents the problem
of the time between product shipment and its availability for sale. The
account receivable is like a loan and represents capital invested, and
often borrowed, by the vendor. But this is not a secure asset until it
is paid. If the customer's debt is credit insured the large, risky asset
becomes more secure, like an insured building. This asset may then be
viewed as collateral
by lending institutions and a loan based upon it used to defray the
expenses of the transaction and to produce more product. Trade credit
insurance is, therefore, a trade finance tool.
Mortgage insurance
Mortgage insurance (also known as mortgage guarantee) is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan.
Mortgage insurance can be either public or private depending upon the
insurer. The policy is also known as a mortgage indemnity guarantee
(MIG), particularly in the UK.
For example, suppose Ms Smith decides to purchase a house which costs $150,000. She pays 10% ($15,000) down payment and takes out a $135,000 ($150,000-$15,000) mortgage on the remaining 90%. Lenders will often require mortgage insurance for mortgage loans which exceed 80% (the typical cut-off) of the property's sale price. Because of her limited equity, the lender requires that Ms Smith pay for mortgage insurance that protects the lender against her default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 25% of the $135,000 ($33,750), leaving the lender with an exposure of $101,250. The mortgage insurer will charge a premium for this coverage, which may be paid by either the borrower or the lender. If the borrower defaults and the property is sold at a loss, the insurer will cover the first $33,750 of losses. Coverages offered by mortgage insurers can vary from 20% to 50% and higher.
For example, suppose Ms Smith decides to purchase a house which costs $150,000. She pays 10% ($15,000) down payment and takes out a $135,000 ($150,000-$15,000) mortgage on the remaining 90%. Lenders will often require mortgage insurance for mortgage loans which exceed 80% (the typical cut-off) of the property's sale price. Because of her limited equity, the lender requires that Ms Smith pay for mortgage insurance that protects the lender against her default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 25% of the $135,000 ($33,750), leaving the lender with an exposure of $101,250. The mortgage insurer will charge a premium for this coverage, which may be paid by either the borrower or the lender. If the borrower defaults and the property is sold at a loss, the insurer will cover the first $33,750 of losses. Coverages offered by mortgage insurers can vary from 20% to 50% and higher.
Payment protection insurance
Payment protection insurance (PPI), also known as credit insurance, credit protection insurance, or loan repayment insurance,
is an insurance product that enables consumers to insure repayment of
loans if the borrower dies, becomes ill or disabled, loses a job, or
faces other circumstances that may prevent them from earning income to
service the debt. It is not to be confused with income protection insurance,
which is not specific to a debt but covers any income. PPI is widely
sold by banks and other credit providers as an add-on to the loan or
overdraft product.
Credit insurance can be purchased to insure all kinds of consumer loans including car loans, loans from finance companies, and home mortgage borrowing. Credit card agreements may include a form of PPI cover as standard. Policies are also available to cover specific categories of risk, e.g. credit life insurance, credit disability insurance, and credit accident insurance.
Although the policy is purchased by the consumer/borrower, the benefit paid in the event of a claim goes to the company that extended credit to the consumer.
PPI usually covers minimum loan (or overdraft) payments for a finite period (typically 12 months). After this point the borrower must find other means to repay the debt, though the period covered by insurance is typically long enough for most people to start working again and earn enough to service their debt. PPI is different from other types of insurance such as home insurance, in that it can be quite difficult to determine if it is right for a person or not. Careful assessment of what would happen if a person became unemployed would need to be considered, as payments in lieu of notice (for example) may render a claim ineligible despite the insured person being genuinely unemployed. In this case, the approach taken by PPI insurers is consistent with that taken by the Benefits Agency in respect of unemployment benefits.
Credit insurance can be purchased to insure all kinds of consumer loans including car loans, loans from finance companies, and home mortgage borrowing. Credit card agreements may include a form of PPI cover as standard. Policies are also available to cover specific categories of risk, e.g. credit life insurance, credit disability insurance, and credit accident insurance.
Although the policy is purchased by the consumer/borrower, the benefit paid in the event of a claim goes to the company that extended credit to the consumer.
PPI usually covers minimum loan (or overdraft) payments for a finite period (typically 12 months). After this point the borrower must find other means to repay the debt, though the period covered by insurance is typically long enough for most people to start working again and earn enough to service their debt. PPI is different from other types of insurance such as home insurance, in that it can be quite difficult to determine if it is right for a person or not. Careful assessment of what would happen if a person became unemployed would need to be considered, as payments in lieu of notice (for example) may render a claim ineligible despite the insured person being genuinely unemployed. In this case, the approach taken by PPI insurers is consistent with that taken by the Benefits Agency in respect of unemployment benefits.
Liability insurance
Liability insurance is a part of the general insurance system of risk
financing to protect the purchaser (the "insured") from the risks of
liabilities imposed by lawsuits and similar claims. It protects the
insured in the event he or she is sued for claims that come within the
coverage of the insurance policy.
Originally, individuals or companies that faced a common peril, formed a group and created a self-help fund out of which to pay compensation should any member incur loss (in other words, a mutual insurance arrangement). The modern system relies on dedicated carriers, usually for-profit, to offer protection against specified perils in consideration of a premium. Liability insurance is designed to offer specific protection against third party insurance claims, i.e., payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. In general, damage caused intentionally as well as contractual liability are not covered under liability insurance policies. When a claim is made, the insurance carrier has the duty (and right) to defend the insured. The legal costs of a defense normally do not affect policy limits unless the policy expressly states otherwise; this default rule is useful because defense costs tend to soar when cases go to trial.
Originally, individuals or companies that faced a common peril, formed a group and created a self-help fund out of which to pay compensation should any member incur loss (in other words, a mutual insurance arrangement). The modern system relies on dedicated carriers, usually for-profit, to offer protection against specified perils in consideration of a premium. Liability insurance is designed to offer specific protection against third party insurance claims, i.e., payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. In general, damage caused intentionally as well as contractual liability are not covered under liability insurance policies. When a claim is made, the insurance carrier has the duty (and right) to defend the insured. The legal costs of a defense normally do not affect policy limits unless the policy expressly states otherwise; this default rule is useful because defense costs tend to soar when cases go to trial.
Aviation insurance
Aviation insurance is insurance coverage geared specifically to
the operation of aircraft and the risks involved in aviation. Aviation
insurance policies are distinctly different from those for other areas
of transportation and tend to incorporate aviation terminology, as well
as terminology, limits and clauses specific to aviation insurance.
Aviation Insurance was first introduced in the early years of the 20th Century. The first aviation insurance policy was written by Lloyd's of London in 1911. The company stopped writing aviation policies in 1912 after bad weather and the resulting crashes at an air meet caused losses on many of those first policies.
The first aviation polices were underwritten by the marine insurance underwriting community. The first specialist aviation insurers emerged in 1924.
In 1929 the Warsaw convention was signed. The convention was an agreement to establish terms, conditions and limitations of liability for carriage by air, this was the first recognition of the airline industry as we know it today.
In 1931, Captain A. G. Lamplugh, the British Aviation Insurance Company's chief underwriter and principal surveyor, said of the new industry: "Aviation in itself is not inherently dangerous. But to an even greater degree than the sea, it is terribly unforgiving of any carelessness, incapacity or neglect."
Aviation Insurance was first introduced in the early years of the 20th Century. The first aviation insurance policy was written by Lloyd's of London in 1911. The company stopped writing aviation policies in 1912 after bad weather and the resulting crashes at an air meet caused losses on many of those first policies.
The first aviation polices were underwritten by the marine insurance underwriting community. The first specialist aviation insurers emerged in 1924.
In 1929 the Warsaw convention was signed. The convention was an agreement to establish terms, conditions and limitations of liability for carriage by air, this was the first recognition of the airline industry as we know it today.
In 1931, Captain A. G. Lamplugh, the British Aviation Insurance Company's chief underwriter and principal surveyor, said of the new industry: "Aviation in itself is not inherently dangerous. But to an even greater degree than the sea, it is terribly unforgiving of any carelessness, incapacity or neglect."
Flood insurance
Flood insurance denotes the specific insurance coverage against property loss from flooding. To determine risk factors for specific properties, insurers will often refer to topographical maps that denote lowlands, floodplains and floodways that are susceptible to flooding.
Nationwide, only 20% of American homes at risk for floods are covered by flood insurance. Most private insurers do not insure against the peril of flood due to the prevalence of adverse selection, which is the purchase of insurance by persons most affected by the specific peril of flood. In traditional insurance, insurers use the economic law of large numbers to charge a relatively small fee to large numbers of people in order to pay the claims of the small numbers of claimants who have suffered a loss. Unfortunately, in flood insurance, the numbers of claimants is larger than the available number of persons interested in protecting their property from the peril, which means that most private insurers view the probability of generating a profit from providing flood insurance as being very remote. However, there are insurers such as Chubb, AIG/Chartis, Fireman's Fund that do provice privatly written primary flood insurance for high value homes and The Natural Catastrophe Insurance Program underwritten by Certain Underwriters at Lloyd's which provides private primary flood insurance on both low value and high value buildings.
Nationwide, only 20% of American homes at risk for floods are covered by flood insurance. Most private insurers do not insure against the peril of flood due to the prevalence of adverse selection, which is the purchase of insurance by persons most affected by the specific peril of flood. In traditional insurance, insurers use the economic law of large numbers to charge a relatively small fee to large numbers of people in order to pay the claims of the small numbers of claimants who have suffered a loss. Unfortunately, in flood insurance, the numbers of claimants is larger than the available number of persons interested in protecting their property from the peril, which means that most private insurers view the probability of generating a profit from providing flood insurance as being very remote. However, there are insurers such as Chubb, AIG/Chartis, Fireman's Fund that do provice privatly written primary flood insurance for high value homes and The Natural Catastrophe Insurance Program underwritten by Certain Underwriters at Lloyd's which provides private primary flood insurance on both low value and high value buildings.
Wikipedia article:Property insurance
Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance or boiler insurance. Property is insured
in two main ways—open perils and named perils. Open perils cover all
the causes of loss not specifically excluded in the policy. Common
exclusions on open peril policies include damage resulting from
earthquakes, floods, nuclear incidents, acts of terrorism and war. Named
perils require the actual cause of loss to be listed in the policy for
insurance to be provided. The more common named perils include such
damage-causing events as fire, lightning, explosion and theft.
Types of Coverage
There are three types of insurance coverage. Replacement cost coverage pays the cost of replacing your property regardless of depreciation or appreciation. Premiums for this type of coverage are based on replacement cost values, and not based on actual cash value. Actual cash value coverage provides for replacement cost minus depreciation. Extended replacement cost will pay over the coverage limit if the costs for construction have increased. This generally will not exceed 25% of the limit. When you obtain an insurance policy, the coverage limit established is the maximum amount the insurance company will pay out in case of loss of property. This amount will need to fluctuate if homes in your neighborhood are rising; the amount needs to be in step with the actual value of your home. In case of a fire, household content replacement is tabulated as a percentage of the value of the home. In case of high value items, the insurance company may ask to specifically cover these items separate from the other household contents. One last coverage option is to have alternative living arrangements included in a policy. If a fire leaves your home uninhabitable, the policy can help pay for a hotel or other living arrangements.Insurance law
Insurance law is the name given to practices of law surrounding insurance, including insurance policies
and claims. It can be broadly broken into three categories - regulation
of the business of insurance; regulation of the content of insurance
policies, especially with regard to consumer policies; and regulation of
claim handling.
The earliest form of insurance is probably marine insurance, although
forms of mutuality (group self-insurance) existed before that. Marine
insurance originated with the merchants of the Hanseatic league and the financiers of Lombardy
in the 12th and 13th centuries, recorded in the name of Lombard Street
in the City of London, the oldest trading insurance market. In those
early days, insurance was intrinsically coupled with the expansion of
mercantilism, and exploration (and exploitation) of new sources of gold,
silver, spices, furs and other precious goods - including slaves - from
the New World. For these merchant adventurers, insurance was the "means
whereof it cometh to pass that upon the loss or perishing of any ship
there followeth not the undoing of any man, but the loss lighteth rather
easily upon many than upon a few... whereby all merchants, especially
those of the younger sort, are allured to venture more willingly and
more freely."
History
Main article: History of insurance
National Insurance
National Insurance (NI) in the United Kingdom is a system of contributions paid by workers and employers, towards the cost of certain state benefits. It was initially a contributory system of insurance against illness and unemployment, and later also provided retirement pensions and other benefits. It was first introduced by the National Insurance Act 1911, expanded by the Labour government in 1948 and has been subject to numerous amendments in subsequent years.
The contributions component of the system currently consists of mandatory contributions, National Insurance Contributions (NICs), paid by employees and employers on earnings, and by employers on certain benefits-in-kind provided to employees. The self-employed contribute partly by a fixed, weekly or monthly payment, and partly on a percentage of net profits above a certain threshold. Individuals may also make voluntary contributions, in order to fill a gap in their contributions record and thus protect their entitlement to benefits. Contributions are collected by HM Revenue and Customs (HMRC) through the PAYE system, along with Income Tax and repayments of Student Loans.
The benefit component comprises a number of contributory benefits of availability and amount determined by the claimant's contribution record and circumstances. Weekly income benefits and some lump-sum benefits to participants upon death, retirement, unemployment, maternity and disability are provided.
Title insurance
Title Insurance is a form of indemnity insurance predominantly found in the United States which insures against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Title insurance is principally a product developed and sold in the United States as a result of an alleged comparative deficiency of the U.S. land records laws. It is meant to protect an owner's or a lender's financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. The first title insurance company, the Law Property Assurance and Trust Society, was formed in Pennsylvania in 1853. The vast majority of title insurance policies are written on land within the United States.
Typically the real property interests insured are fee simple ownership or a mortgage. However, title insurance can be purchased to insure any interest in real property, including an easement, lease or life estate.
There are two types of policies - owner and loan. Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance [a loan policy] to protect their interest in the collateral of loans secured by real estate. Some mortgage lenders, especially non-institutional lenders, may not require title insurance. Buyers purchasing properties for cash or with a mortgage lender often want title insurance [an owner policy] as well. A loan policy provides no coverage or benefit for the buyer/owner and so the decision to purchase an owner policy is independent of the lender's decision to require a loan policy.
Title insurance is available in many other countries, such as Canada, Australia, the United Kingdom, Mexico, New Zealand, Japan, China, Korea and throughout Europe. However, while a substantial number of properties located in these countries are insured by U.S. title insurers, they do not constitute a significant share of the real estate transactions in those countries. They also do not constitute a large share of U.S. title insurers' revenues. In many cases these are properties to be used for commercial purposes by U.S. companies doing business abroad, or properties financed by U.S lenders. The U.S. companies involved buy title insurance to obtain the security of a U.S. insurer backing up the evidence of title that they receive from the other country's land registration system, and payment of legal defense costs if the title is challenged.
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment. The policy holder typically pays a premium, either regularly or as a lump sum. Other expenses (such as funeral expenses) are also sometimes included in the premium.
The advantage for the policy owner is "peace of mind", in knowing that the death of the insured person will not result in financial hardship for loved ones.
Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; common examples are claims relating to suicide, fraud, war, riot and civil commotion.
Life-based contracts tend to fall into two major categories:
- Protection policies – designed to provide a benefit in the event of specified event, typically a lump sum payment. A common form of this design is term insurance.
- Investment policies – where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms (in the US) are whole life, universal life and variable life policies.
Parties to contract
There is a difference between the insured and the policy owner, although the owner and the insured are often the same person. For example, if Joe buys a policy on his own life, he is both the owner and the insured. But if Jane, his wife, buys a policy on Joe's life, she is the owner and he is the insured. The policy owner is the guarantor and he will be the person to pay for the policy. The insured is a participant in the contract, but not necessarily a party to it. Also, most companies allow the payer and owner to be different, e. g. a grandparent paying premiums for a policy on a child, owned by a grandchild.The beneficiary receives policy proceeds upon the insured person's death. The owner designates the beneficiary, but the beneficiary is not a party to the policy. The owner can change the beneficiary unless the policy has an irrevocable beneficiary designation. If a policy has an irrevocable beneficiary, any beneficiary changes, policy assignments, or cash value borrowing would require the agreement of the original beneficiary.
Health insurance
Health insurance is insurance against the risk of incurring medical expenses among individuals. By estimating the overall risk of health care expenses among a targeted group, an insurer can develop a routine finance structure, such as a monthly premium or payroll tax, to ensure that money is available to pay for the health care benefits specified in the insurance agreement. The benefit is administered by a central organization such as a government agency, private business, or not-for-profit entity.
Background
A health insurance policy is:1) a contract between an insurance provider (e.g. an insurance company or a government) and an individual or his/her sponsor (e.g. an employer or a community organization). The contract can be renewable (e.g. annually, monthly) or lifelong in the case of private insurance, or be mandatory for all citizens in the case of national plans. The type and amount of health care costs that will be covered by the health insurance provider are specified in writing, in a member contract or "Evidence of Coverage" booklet for private insurance, or in a national health policy for public insurance.
2) Insurance coverage is provided by an employer-sponsored self-funded ERISA plan. The company generally advertises that they have one of the big insurance companies. However, in an ERISA case, that insurance company "doesn't engage in the act of insurance", they just administer it. Therefore ERISA plans are not subject to state laws. ERISA plans are governed by federal law under the jurisdiction of the US Department of Labor (USDOL). The specific benefits or coverage details are found in the Summary Plan Description (SPD). An appeal must go through the insurance company, then to the Employer's Plan Fiduciary. If still required, the Fiduciary’s decision can be brought to the USDOL to review for ERISA compliance, and then file a lawsuit in federal court.
GAP insurance
GAP insurance is also known as Guaranteed Auto Protection or Guaranteed Asset Protection and as GAP within the North American financial industry. GAP is the difference between the actual cash value of a vehicle minus all deductible perils (if at fault) and liens (especially in Canada) and the lease or loan balance minus financed soft products (such as its own cost) or negative equity on a trade. GAP coverage is mainly used on new and used small vehicles (cars and trucks) and heavy trucks. Some financing companies require it.
GAP insurance covers the amount on a loan that is the difference between the asset value and the amount covered by another insurance policy. Some GAP policies also cover the deductible. This coverage is marketed for low down payment loans, high interest rate loans and loans with 60 month or longer terms. GAP insurance is typically offered by a finance company at time of purchase. Most auto insurance companies offer this coverage to consumers.
There are two ways of getting GAP coverage. The first type is an insurance policy sold by a broker. The second type is a waiver agreement sold by a Finance & Insurance Manager. The first is regulated by the insurance industry, the second is unregulated. In either case coverage is usually the same and sold as a soft product through the car dealership. Coverage is usually financed along with the lease/loan. Claims are subject to a total loss. The total loss is usually determined by the primary insurance company’s third-party appraiser.
Exclusions to GAP insurance vary by country or state. Some exclusions include a maximum loss limit of $50,000 while others require a loan term of less than 84 months. GAP is an optional purchase; however, many states in the US require that a car dealership offer GAP at the point of purchase. States such as Louisiana require that the purchaser sign a disclosure document as proof. Although GAP is optional, some finance companies require GAP as a condition to obtaining a loan.
Description above from the Wikipedia article GAP insurance,More
Home insurance
Home insurance, also commonly called hazard insurance or homeowner's insurance (often abbreviated in the real estate industry as HOI), is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one's home, its contents, loss of its use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory. It requires that at least one of the named insureds occupies the home. The dwelling policy (DP) is similar, but used for residences which don't qualify for various reasons, such as vacancy/non-occupancy, seasonal/secondary residence, or age.
It's a multiple-line insurance, meaning that it includes both property insurance and liability coverage, with an indivisible premium, meaning that a single premium is paid for all risks. Standard forms divide coverage into several categories, and the coverage provided is typically a percentage of Coverage A, which is coverage for the main dwelling.
The cost of homeowner's insurance often depends on what it would cost to replace the house and which additional riders—additional items to be insured—are attached to the policy. The insurance policy itself is a lengthy contract, and names what will and what will not be paid in the case of various events. Typically, claims due to floods or war (whose definition typically includes a nuclear explosion from any source), amongst other standard exclusions (like termites), are excluded. Special insurance can be purchased for these possibilities, including flood insurance. Insurance should be adjusted to reflect replacement cost, usually upon application of an inflation factor or a cost index.
Vehicle insurance
Vehicle insurance (also known as auto insurance, GAP insurance, car insurance, or motor insurance) is insurance purchased for cars, trucks, motorcycles,
and other road vehicles. Its primary use is to provide financial
protection against physical damage and/or bodily injury resulting from traffic collisions and against liability that could also arise therefrom. The specific terms of vehicle insurance vary with legal regulations
in each region. To a lesser degree vehicle insurance may additionally
offer financial protection against theft of the vehicle and posibly
damage to the vehicle, sustained from things other than traffic
collisions.
Several jurisdictions have experimented with a "pay-as-you-drive" insurance plan which is paid through a gasoline tax (petrol tax). This would address issues of uninsured motorists and also charge based on the miles (kilometres) driven, which could theoretically increase the efficiency of the insurance, through streamlined collection.
In Victoria, Third Party Personal insurance from the Transport Accident Commission is similarly included, through a levy, in the vehicle registration fee.
Public policies
In many jurisdictions it is compulsory to have vehicle insurance before using or keeping a motor vehicle on public roads. Most jurisdictions relate insurance to both the car and the driver, however the degree of each varies greatly.Several jurisdictions have experimented with a "pay-as-you-drive" insurance plan which is paid through a gasoline tax (petrol tax). This would address issues of uninsured motorists and also charge based on the miles (kilometres) driven, which could theoretically increase the efficiency of the insurance, through streamlined collection.
Australia
In South Australia, Third Party Personal insurance from the Motor Accident Commission is included in the licence registration fee for people over 17. A similar scheme applies in Western Australia.In Victoria, Third Party Personal insurance from the Transport Accident Commission is similarly included, through a levy, in the vehicle registration fee.
Marine insurance
Marine insurance covers the loss or damage of ships, cargo,
terminals, and any transport or cargo by which property is transferred,
acquired, or held between the points of origin and final destination..
Cargo insurance — discussed here — is a sub-branch of marine insurance, though Marine also includes Onshore and Offshore exposed property (container terminals, ports, oil platforms, pipelines); Hull; Marine Casualty; and Marine Liability.
The modern origins of marine insurance law in English law were in the law merchant, with the establishment in England in 1601 of a specialized chamber of assurance separate from the other Courts. Lord Mansfield, Lord Chief Justice in the mid-eighteenth century, began the merging of law merchant and common law principles. The establishment of Lloyd's of London, competitor insurance companies, a developing infrastructure of specialists (such as shipbrokers, admiralty lawyers, bankers, surveyors, loss adjusters, general average adjusters, et al), and the growth of the British Empire gave English law a prominence in this area which it largely maintains and forms the basis of almost all modern practice. The growth of the London insurance market led to the standardization of policies and judicial precedent further developed marine insurance law. In 1906 the Marine Insurance Act was passed which codified the previous common law; it is both an extremely thorough and concise piece of work. Although the title of the Act refers to marine insurance, the general principles have been applied to all non-life insurance.
Cargo insurance — discussed here — is a sub-branch of marine insurance, though Marine also includes Onshore and Offshore exposed property (container terminals, ports, oil platforms, pipelines); Hull; Marine Casualty; and Marine Liability.
Origins of formal marine insurance
Maritime insurance was the earliest well-developed kind of insurance, with origins in the Greek and Roman maritime loan. Separate marine insurance contracts were developed in Genoa and other Italian cities in the fourteenth century and spread to northern Europe. Premiums varied with intuitive estimates of the variable risk from seasons and pirates.The modern origins of marine insurance law in English law were in the law merchant, with the establishment in England in 1601 of a specialized chamber of assurance separate from the other Courts. Lord Mansfield, Lord Chief Justice in the mid-eighteenth century, began the merging of law merchant and common law principles. The establishment of Lloyd's of London, competitor insurance companies, a developing infrastructure of specialists (such as shipbrokers, admiralty lawyers, bankers, surveyors, loss adjusters, general average adjusters, et al), and the growth of the British Empire gave English law a prominence in this area which it largely maintains and forms the basis of almost all modern practice. The growth of the London insurance market led to the standardization of policies and judicial precedent further developed marine insurance law. In 1906 the Marine Insurance Act was passed which codified the previous common law; it is both an extremely thorough and concise piece of work. Although the title of the Act refers to marine insurance, the general principles have been applied to all non-life insurance.
Wikipedia article:Subprime lending
In finance, subprime lending (also referred to as near-prime, non-prime, and second-chance lending) means making loans
to people who may have difficulty maintaining the repayment schedule.
These loans are characterized by higher interest rates and less
favorable terms in order to compensate for higher credit risk.
Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market. Professor Harvey S. Rosen of Princeton University explained, "The main thing that innovations in the mortgage market have done over the past 30 years is to let in the excluded: the young, the discriminated-against, the people without a lot of money in the bank to use for a down payment."
Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market. Professor Harvey S. Rosen of Princeton University explained, "The main thing that innovations in the mortgage market have done over the past 30 years is to let in the excluded: the young, the discriminated-against, the people without a lot of money in the bank to use for a down payment."
Defining subprime risk
The term subprime refers to the credit quality of particular borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers.As people become economically active, records are created relating to their borrowing, earning and lending history. This is called a credit rating, and although covered by privacy laws the information is readily available to people with a need to know (in some countries, loan applications specifically allow the lender to access such records). Subprime borrowers have credit ratings that might include:- limited debt experience (so the lender's assessor simply does not know, and assumes the worst), or
- no possession of property assets that could be used as security (for the lender to sell in case of default)
- excessive debt (the known income of the individual or family is unlikely to be enough to pay living expenses + interest + repayment),
- a history of late or sometimes missed payments (morose debt[citation needed]) so that the loan period had to be extended,
- failures to pay debts completely (default debt), and
- any legal judgments such as "orders to pay" or bankruptcy (sometimes known in Britain as county court judgements or CCJs).
Wikipedia article:Social Credit
Social credit is an economic philosophy developed by C. H. Douglas (1879–1952), a British engineer, who wrote a book by that name in 1924. Social Credit is described by Douglas as "the policy of a philosophy"; he called his philosophy "practical Christianity". This philosophy is interdisciplinary in nature, encompassing the fields of economics, political science, history, accounting and physics. Assuming the only safe place for power is in many hands, social credit is a distributive
philosophy, and its policy is to disperse power to individuals. Social
Credit philosophy is best summed by Douglas when he said, "Systems were
made for men, and not men for systems, and the interest of man which is self-development, is above all systems, whether theological, political or economic."
Douglas said that Social Crediters want to build a new civilization
based upon absolute economic security for the individual—where “...they
shall sit every man under his vine and under his fig tree; and none shall make them afraid.
In other words, Douglas did not seek to build a utopia, but to set the
conditions upon which each individual can build their own utopia.
It was while he was reorganising the work at Farnborough during World War I that Douglas noticed that the weekly total costs of goods produced was greater than the sums paid out to workers for wages, salaries and dividends. This seemed to contradict the theory put forth by classic Ricardian economics, that all costs are distributed simultaneously as purchasing power. Troubled by the seeming disconnect between the way money flowed and the objectives of industry ("delivery of goods and services", in his view), Douglas set out to apply engineering methods to the economic system.
Douglas collected data from over a hundred large British businesses and found that in every case, except that of companies heading for bankruptcy, the sums paid out in salaries, wages and dividends were always less than the total costs of goods and services produced each week: the workers were not paid enough to buy back what they had made. He published his observations and conclusions in an article in the English Review where he suggested: "That we are living under a system of accountancy which renders the delivery of the nation's goods and services to itself a technical impossibility." He later formalized this observation in his A+B theorem. The theorem divides a company's payments into two categories: A = income, and B = payments to other organizations. Prices equal A+B, but income only equals A in any cycle of production and consumption. Since income (A) is always less than total prices (A+B), he believed the theorem demonstrated that people's income is always insufficient to buy back all of production: the consequence of which is ever increasing debt.
It was while he was reorganising the work at Farnborough during World War I that Douglas noticed that the weekly total costs of goods produced was greater than the sums paid out to workers for wages, salaries and dividends. This seemed to contradict the theory put forth by classic Ricardian economics, that all costs are distributed simultaneously as purchasing power. Troubled by the seeming disconnect between the way money flowed and the objectives of industry ("delivery of goods and services", in his view), Douglas set out to apply engineering methods to the economic system.
Douglas collected data from over a hundred large British businesses and found that in every case, except that of companies heading for bankruptcy, the sums paid out in salaries, wages and dividends were always less than the total costs of goods and services produced each week: the workers were not paid enough to buy back what they had made. He published his observations and conclusions in an article in the English Review where he suggested: "That we are living under a system of accountancy which renders the delivery of the nation's goods and services to itself a technical impossibility." He later formalized this observation in his A+B theorem. The theorem divides a company's payments into two categories: A = income, and B = payments to other organizations. Prices equal A+B, but income only equals A in any cycle of production and consumption. Since income (A) is always less than total prices (A+B), he believed the theorem demonstrated that people's income is always insufficient to buy back all of production: the consequence of which is ever increasing debt.
Settlement (finance)
Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against (in simultaneous exchange for) payment of money, to fulfill contractual obligations, such as those arising under securities trades.
In the U.S., the settlement date for marketable stocks is usually 3 business days after the trade is executed, and for listed options and government securities it is usually 1 day after the execution.
As part of performance on the delivery obligations entailed by the trade, settlement involves the delivery of securities and the corresponding payment.
A number of risks arise for the parties during the settlement interval, which are managed by the process of clearing, which follows trading and precedes settlement. Clearing involves modifying those contractual obligations so as to facilitate settlement, often by netting and novation.
In the U.S., the settlement date for marketable stocks is usually 3 business days after the trade is executed, and for listed options and government securities it is usually 1 day after the execution.
As part of performance on the delivery obligations entailed by the trade, settlement involves the delivery of securities and the corresponding payment.
A number of risks arise for the parties during the settlement interval, which are managed by the process of clearing, which follows trading and precedes settlement. Clearing involves modifying those contractual obligations so as to facilitate settlement, often by netting and novation.
Nature of settlement
Settlement involves the delivery of securities from one party to another. Delivery usually takes place against payment, but some deliveries are made without a corresponding payment (sometimes referred to as a free delivery). Examples of a delivery without payment are the delivery of securities collateral against a loan of securities, and a delivery made pursuant to a margin call.Wikipedia article:Revolving credit
Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Examples of revolving credits used by consumers include credit cards.
Corporate revolving credit facilities are typically used to provide
liquidity for a company's day-to-day operations. They were first
introduced by the Strawbridge and Clothier Department Store.
A revolving loan facility is a particularly flexible financing tool as it may be drawn by a borrower by way of straightforward loans, but it is also possible to incorporate different types of financial accommodation within it - for example, it is possible to incorporate a letter of credit facility, swingline facility or overdraft facility within the terms of a revolving credit facility. This is often achieved by creating a sublimit within the overall revolving facility, allowing a certain amount of the lenders' commitment to be drawn in the form of these different facilities.
Description above from the Wikipedia article Revolving credit,More
Typical characteristics
- Case study is required
- The borrower may use or withdraw funds up to a pre-approved credit limit.
- The amount of available credit decreases and increases as funds are borrowed and then repaid.
- The credit may be used repeatedly.
- The borrower makes payments based only on the amount they've actually used or withdrawn, plus interest.
- The borrower may repay over time (subject to any minimum payment requirement), or in full at any time.
- In some cases, the borrower is required to pay a fee to the lender for any money that is undrawn on the revolver; this is especially true of corporate bank loan revolving credit facilities.
A revolving loan facility is a particularly flexible financing tool as it may be drawn by a borrower by way of straightforward loans, but it is also possible to incorporate different types of financial accommodation within it - for example, it is possible to incorporate a letter of credit facility, swingline facility or overdraft facility within the terms of a revolving credit facility. This is often achieved by creating a sublimit within the overall revolving facility, allowing a certain amount of the lenders' commitment to be drawn in the form of these different facilities.
Description above from the Wikipedia article Revolving credit,More
Wikipedia article:Predatory lending
Predatory lending describes unfair, deceptive, or fraudulent practices of some lenders
during the loan origination process. While there are no legal
definitions in the United States for predatory lending, an audit report
on predatory lending from the office of inspector general of the FDIC broadly defines predatory lending as "imposing unfair and abusive loan terms on borrowers. Though there are laws against many of the specific practices commonly
identified as predatory, various federal agencies use the term as a
catch-all term for many specific illegal activities in the loan industry. Predatory lending should not be confused with predatory mortgage servicing
which is used to describe the unfair, deceptive, or fraudulent
practices of lenders and servicing agents during the loan or mortgage
servicing process, post loan origination.
One less contentious definition of the term is "the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against." Other types of lending sometimes also referred to as predatory include payday loans, credit cards or other forms of consumer debt, and overdraft loans, when the interest rates are considered unreasonably high. Although predatory lenders are most likely to target the less educated, the poor, racial minorities, and the elderly, victims of predatory lending are represented across all demographics.
Predatory lending typically occurs on loans backed by some kind of collateral, such as a car or house, so that if the borrower defaults on the loan, the lender can repossess or foreclose and profit by selling the repossessed or foreclosed property. Lenders may be accused of tricking a borrower into believing that an interest rate is lower than it actually is, or that the borrower's ability to pay is greater than it actually is. The lender, or others as agents of the lender, may well profit from repossession or foreclosure upon the collateral.
One less contentious definition of the term is "the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against." Other types of lending sometimes also referred to as predatory include payday loans, credit cards or other forms of consumer debt, and overdraft loans, when the interest rates are considered unreasonably high. Although predatory lenders are most likely to target the less educated, the poor, racial minorities, and the elderly, victims of predatory lending are represented across all demographics.
Predatory lending typically occurs on loans backed by some kind of collateral, such as a car or house, so that if the borrower defaults on the loan, the lender can repossess or foreclose and profit by selling the repossessed or foreclosed property. Lenders may be accused of tricking a borrower into believing that an interest rate is lower than it actually is, or that the borrower's ability to pay is greater than it actually is. The lender, or others as agents of the lender, may well profit from repossession or foreclosure upon the collateral.
Wikipedia article:Payday loan
A payday loan (also called a payday advance) is a small, short-term, loan secured against a customer's next pay check. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Pay day advance loans rely on the consumer having previous payroll and employment records. Legislation regarding payday loans varies widely between different countries and, within the USA, between different states.
To prevent usury (unreasonable and excessive rates of interest), some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge. Some jurisdictions outlaw payday lending entirely, and some have very few restrictions on payday lenders. Due to the extremely short-term nature of payday loans, the difference between nominal APR and effective APR (EAR) can be substantial, because EAR takes compounding into account. For a $15 charge on a $100 2-week payday loan, the annual percentage rate is 26 × 15% = 390%; the usefulness of an annual rate (such as an APR) has been debated because APRs are designed to enable consumers to compare the cost of long-term credit and may not be meaningful in cases where the loan will be outstanding for only a few weeks. Likewise, an "effective" rate (such as an EAR —
)
may have even more limited value because payday loans do not permit
interest compounding; the principal amount remains the same, regardless
of how long the loan is outstanding. Nevertheless, careful scrutiny of
the particular measure of loan cost quoted is necessary to make
meaningful comparisons.
To prevent usury (unreasonable and excessive rates of interest), some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge. Some jurisdictions outlaw payday lending entirely, and some have very few restrictions on payday lenders. Due to the extremely short-term nature of payday loans, the difference between nominal APR and effective APR (EAR) can be substantial, because EAR takes compounding into account. For a $15 charge on a $100 2-week payday loan, the annual percentage rate is 26 × 15% = 390%; the usefulness of an annual rate (such as an APR) has been debated because APRs are designed to enable consumers to compare the cost of long-term credit and may not be meaningful in cases where the loan will be outstanding for only a few weeks. Likewise, an "effective" rate (such as an EAR —
)
may have even more limited value because payday loans do not permit
interest compounding; the principal amount remains the same, regardless
of how long the loan is outstanding. Nevertheless, careful scrutiny of
the particular measure of loan cost quoted is necessary to make
meaningful comparisons.Wikipedia article:Line of credit
A line of credit is any credit source extended to a government, business or individual by a bank or other financial institution. A line of credit may take several forms, such as overdraft protection, demand loan, special purpose, export packing credit, term loan, discounting, purchase of commercial bills, traditional revolving credit card account, etc. It is effectively a bank account that can readily be tapped at the borrower's discretion. Interest
is paid only on money actually withdrawn, although the borrower may be
required to pay an unused line fee, often an annualized percentage fee
on the money not withdrawn. Lines of credit can be secured by collateral or unsecured.
Lines of credit are often extended by banks, financial institutions and other licensed consumer lenders to creditworthy customers (though certain special purpose lines of credit may not have creditworthiness requirements) to address liquidity problems; such a line of credit is often called a personal line of credit. The term is also used to mean the credit limit of a customer, that is, the maximum amount of credit a customer is allowed.
In India, banks offer Cash Credit accounts to businesses to finance their ' Working Capital ' requirements [ requirements to buy raw materials or ' Current Assets ', as opposed to machinery or buildings, which would be called ' Fixed Assets ' ] . The cash credit account is similar to current accounts as it is a running account [ i.e. payable on demand ] with cheque book facility. But unlike ordinary current accounts, which are supposed to be overdrawn only occasionally, the cash credit account is supposed to be overdrawn almost continuously. The extent of overdrawing is limited to the Cash Credit Limit that is sanctioned by the bank. This sanction is based on an assessment of the maximum working capital requirement of the organisation less the margin . The organisation finances the margin amount from its own funds.
Generally, Cash Credit account is secured by a charge on the Current assets [ inventory ] of the organisation. The kind of charge created can be either Pledge or Hypothecation.
Description above from the Wikipedia article Line of credit,More
Lines of credit are often extended by banks, financial institutions and other licensed consumer lenders to creditworthy customers (though certain special purpose lines of credit may not have creditworthiness requirements) to address liquidity problems; such a line of credit is often called a personal line of credit. The term is also used to mean the credit limit of a customer, that is, the maximum amount of credit a customer is allowed.
Cash credit
A cash credit is a short-term cash loan to a company. A bank provides this type of funding, but only after the required security is given to secure the loan. Once a security for repayment has been given, the business that receives the loan can continuously draw from the bank up to a certain specified amount.Cash Credit in India
In India, banks offer Cash Credit accounts to businesses to finance their ' Working Capital ' requirements [ requirements to buy raw materials or ' Current Assets ', as opposed to machinery or buildings, which would be called ' Fixed Assets ' ] . The cash credit account is similar to current accounts as it is a running account [ i.e. payable on demand ] with cheque book facility. But unlike ordinary current accounts, which are supposed to be overdrawn only occasionally, the cash credit account is supposed to be overdrawn almost continuously. The extent of overdrawing is limited to the Cash Credit Limit that is sanctioned by the bank. This sanction is based on an assessment of the maximum working capital requirement of the organisation less the margin . The organisation finances the margin amount from its own funds.
Generally, Cash Credit account is secured by a charge on the Current assets [ inventory ] of the organisation. The kind of charge created can be either Pledge or Hypothecation.
Special purpose line of credit
A relatively recent credit product has arisen due to economic trends and the impact the economy has had on individuals in general, but specifically for disadvantaged individuals due to special circumstances, affiliations, gender, or external bias. Lenders of many types have explored providing targeted services to select groups. However, most successful attempts have been done by consumer lending entities (licensed and unlicensed) that are generally filling a niche credit service abandoned by the traditional providers. These are credit services that, based on one or more pre-defined criteria, may qualify a borrower for their credit services.Description above from the Wikipedia article Line of credit,More
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists. In an accounting context, Shareholders' equity
(or stockholders' equity, shareholders' funds, shareholders' capital or
similar terms) represents the remaining interest in assets of a
company, spread among individual shareholders of common or preferred stock.
At the start of a business, owners put some funding into the business to finance operations. This creates a liability on the business in the shape of capital as the business is a separate entity from its owners. Businesses can be considered, for accounting purposes, sums of liabilities and assets; this is the accounting equation. After liabilities have been accounted for the positive remainder is deemed the owner's interest in the business.
This definition is helpful in understanding the liquidation process in case of bankruptcy. At first, all the secured creditors are paid against proceeds from assets. Afterward, a series of creditors, ranked in priority sequence, have the next claim/right on the residual proceeds. Ownership equity is the last or residual claim against assets, paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, nothing is left over to reimburse owners' equity. Thus owners' equity is reduced to zero. Ownership equity is also known as risk capital or liable capital.
At the start of a business, owners put some funding into the business to finance operations. This creates a liability on the business in the shape of capital as the business is a separate entity from its owners. Businesses can be considered, for accounting purposes, sums of liabilities and assets; this is the accounting equation. After liabilities have been accounted for the positive remainder is deemed the owner's interest in the business.
This definition is helpful in understanding the liquidation process in case of bankruptcy. At first, all the secured creditors are paid against proceeds from assets. Afterward, a series of creditors, ranked in priority sequence, have the next claim/right on the residual proceeds. Ownership equity is the last or residual claim against assets, paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, nothing is left over to reimburse owners' equity. Thus owners' equity is reduced to zero. Ownership equity is also known as risk capital or liable capital.
Wikipedia article:Student loan
A student loan is designed to help students pay for university
tuition, books, and living expenses. It may differ from other types of
loans in that the interest rate may be substantially lower and the
repayment schedule may be deferred while the student is still in
education. It also differs in many countries in the strict laws
regulating re-negotiating and bankruptcy.
There has been criticism that the HECS-HELP scheme creates an incentive for people to leave the country after graduation, because those who do not file an Australian tax return do not make any repayments.
Australia
Tertiary student places in Australia are usually funded through the HECS-HELP scheme. This funding is in the form of loans that are not normal debts. They are repaid over time via a supplementary tax, using a sliding scale based on taxable income. As a consequence, loan repayments are only made when the former student has income to support the repayments. The debt does not attract normal interest, but grows with CPI inflation. Discounts are available for early repayment. The scheme is available to citizens and permanent humanitarian visa holders. Means-tested scholarships for living expenses are also available. Special assistance is available to indigenous students.There has been criticism that the HECS-HELP scheme creates an incentive for people to leave the country after graduation, because those who do not file an Australian tax return do not make any repayments.
United Kingdom
Main article: Student loans in the United Kingdom
Financial literacy
Financial literacy is the ability to understand finance.
More specifically, it refers to the set of skills and knowledge that
allows an individual to make informed and effective decisions through
their understanding of finances. Raising interest in personal finance is now a focus of state-run programs in countries including Australia, Japan, the United States and the UK.
The Organization for Economic Co-operation and Development (OECD) started an inter-governmental project in 2003 with the objective of providing ways to improve financial education and literacy standards through the development of common financial literacy principles. In March 2008, the OECD launched the International Gateway for Financial Education, which serves as a clearinghouse for financial education programs, information and research worldwide. In the UK, the alternative term “financial capability” is used by the state and its agencies: the Financial Services Authority (FSA) in the UK started a national strategy on financial capability in 2003. The US Government also established its Financial Literacy and Education Commission in 2003.
In July 2010, the United States Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which created the Consumer Financial Protection Bureau (CFPB). The CFPB has been tasked, among other mandates, with promoting financial education through its Consumer Engagement & Education group.
The Organization for Economic Co-operation and Development (OECD) started an inter-governmental project in 2003 with the objective of providing ways to improve financial education and literacy standards through the development of common financial literacy principles. In March 2008, the OECD launched the International Gateway for Financial Education, which serves as a clearinghouse for financial education programs, information and research worldwide. In the UK, the alternative term “financial capability” is used by the state and its agencies: the Financial Services Authority (FSA) in the UK started a national strategy on financial capability in 2003. The US Government also established its Financial Literacy and Education Commission in 2003.
In July 2010, the United States Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which created the Consumer Financial Protection Bureau (CFPB). The CFPB has been tasked, among other mandates, with promoting financial education through its Consumer Engagement & Education group.
International findings
An international OECD study was published in late 2005 analysing financial literacy surveys in OECD countries. A selection of findings included:Default (finance)
In finance, default
occurs when a debtor has not met his or her legal obligations according
to the debt contract, e.g. has not made a scheduled payment, or has
violated a loan covenant (condition) of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either unwilling or unable to pay his or her debt. This can occur with all debt obligations including bonds, mortgages, loans, and promissory notes.
Affirmative covenants are clauses in debt contracts that require firms to maintain certain levels of capital or financial ratios. The most commonly violated restrictions in affirmative covenants are tangible net worth, working capital/short term liquidity, and debt service coverage.
Distinction from insolvency and bankruptcy
The term default should be distinguished from the terms insolvency and bankruptcy.- "Default" essentially means a debtor has not paid a debt which he or she is required to have paid.
- "Insolvency" is a legal term meaning that a debtor is unable to pay his or her debts.
- "Bankruptcy" is a legal finding that imposes court supervision over the financial affairs of those who are insolvent or in default.
Types of default
Default can be of two types: debt services default and technical default. Debt service default occurs when the borrower has not made a scheduled payment of interest or principal. Technical default occurs when an affirmative or a negative covenant is violated.Affirmative covenants are clauses in debt contracts that require firms to maintain certain levels of capital or financial ratios. The most commonly violated restrictions in affirmative covenants are tangible net worth, working capital/short term liquidity, and debt service coverage.
Wikipedia article:Debt
A debt is an obligation owed by one party (the debtor) to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.
A debt is created when a creditor agrees to lend a sum of assets to a debtor. Debt is usually granted with expected repayment; in modern society, in most cases, this includes repayment of the original sum, plus interest.
In finance, debt is a means of using anticipated future purchasing power in the present before it has actually been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy.
Debt is as old as economy. The anthropologist David Graeber argues in Debt: The First 5000 Years
that trade starts with some sort of credit namely the promise to pay
later for already handed over goods. Therefore credit and debt existed
even before coins.
A debt is created when a creditor agrees to lend a sum of assets to a debtor. Debt is usually granted with expected repayment; in modern society, in most cases, this includes repayment of the original sum, plus interest.
In finance, debt is a means of using anticipated future purchasing power in the present before it has actually been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy.
Etymology
The word comes from the French dette and ultimately Latin debere (to owe), from de habere (to have). The letter b in the word debt was reintroduced in the 18th century, possibly by Samuel Johnson in his Dictionary of 1755 – several other words that had existed without a b had them reinserted at around that time.History of debt
See also: History of money
Wikipedia article:Credit score
A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus.Lenders, such as banks
and credit card companies, use credit scores to evaluate the potential
risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate,
and what credit limits. Lenders also use credit scores to determine
which customers are likely to bring in the most revenue. The use of
credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.
Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques.
Although logistic (or non-linear) probability modelling is still the most popular means by which to develop scorecards, various other methods offer extremely powerful alternatives, including MARS, CART, CHAID, and random forests.
At present Veda Advantage, the main provider of credit file data, only provides a negative credit reporting system which contains information on applications for credit and adverse listings indicating a default under a credit contract. This makes accurate credit scoring difficult for banks if they have no existing relationship with a prospective borrower.
Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques.
Australia
In Australia, credit scoring is widely accepted as the primary method of assessing credit worthiness. Credit scoring is not only used to determine whether credit should be approved to an applicant, but credit scoring is also used in the setting of credit limits on credit cards/store cards, in behavioral modelling such as collections scoring, and also in the pre-approval of additional credit to a company's existing client base.Although logistic (or non-linear) probability modelling is still the most popular means by which to develop scorecards, various other methods offer extremely powerful alternatives, including MARS, CART, CHAID, and random forests.
At present Veda Advantage, the main provider of credit file data, only provides a negative credit reporting system which contains information on applications for credit and adverse listings indicating a default under a credit contract. This makes accurate credit scoring difficult for banks if they have no existing relationship with a prospective borrower.
Wikipedia article:Credit risk
Credit risk refers to the risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do. The risk is primarily that of the lender and include lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial and can arise in a number of circumstances. For example:
- A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan
- A company is unable to repay amounts secured by a fixed or floating charge over the assets of the company
- A business or consumer does not pay a trade invoice when due
- A business does not pay an employee's earned wages when due
- A business or government bond issuer does not make a payment on a coupon or principal payment when due
- An insolvent insurance company does not pay a policy obligation
- An insolvent bank won't return funds to a depositor
- A government grants bankruptcy protection to an insolvent consumer or business
Credit score (United States)
A credit score in the United States is a number representing the creditworthiness of a person, the likelihood that person will pay his or her debts.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers. Widespread use of credit scores has made credit more widely available and cheaper for consumers.
It provides a snapshot of risk that banks and other institutions use to help make lending decisions. Applicants with higher FICO scores might be offered better interest rates on mortgages or automobile loans as well as higher credit limit amounts.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers. Widespread use of credit scores has made credit more widely available and cheaper for consumers.
Credit scoring models
FICO score
The best-known and most widely used credit score model in the United States, the FICO score is calculated statistically, with information from a consumer's credit files. The letters stand for Fair Isaac Corporation.It provides a snapshot of risk that banks and other institutions use to help make lending decisions. Applicants with higher FICO scores might be offered better interest rates on mortgages or automobile loans as well as higher credit limit amounts.
Makeup of the FICO score
Credit scores are designed to measure the risk of default by taking into account various factors in a person's financial history. Although the exact formulas for calculating credit scores are secret, FICO has disclosed the following components:Credit history
Credit history or credit report is, in many countries, a
negative record of an individual's or company's past borrowing and
repaying, including information about late payments and bankruptcy. The term "credit reputation" can either be used synonymous to credit history or to credit score.
In the U.S., when a customer fills out an application for credit from a bank, store or credit card company, their information is forwarded to a credit bureau. The credit bureau matches the name, address and other identifying information on the credit applicant with information retained by the bureau in its files. That's why it's very important for creditors, lenders and others to provide accurate data to credit bureaus.
This information is used by lenders such as credit card companies to determine an individual's credit worthiness; that is, determining an individual's ability and track record of repaying a debt. The willingness to repay a debt is indicated by how timely past payments have been made to other lenders. Lenders like to see consumer debt obligations paid regularly and on time, and therefore focus particularly on missed payments and may not, for example, consider an overpayment as an offset for a missed payment.
There has been much discussion over the accuracy of the data in consumer reports. In general, industry participants maintain that the data in credit reports is very accurate. The credit bureaus point to their own study of 52 million credit reports to highlight that the data in reports is very accurate. The Consumer Data Industry Association testified before the United States Congress that less than two percent of those reports that resulted in a consumer dispute had data deleted because it was in error. Nonetheless, there is widespread concern that information in credit reports is prone to error. Thus Congress has enacted a series of laws aimed to resolve both the errors and the perception of errors.
In the U.S., when a customer fills out an application for credit from a bank, store or credit card company, their information is forwarded to a credit bureau. The credit bureau matches the name, address and other identifying information on the credit applicant with information retained by the bureau in its files. That's why it's very important for creditors, lenders and others to provide accurate data to credit bureaus.
This information is used by lenders such as credit card companies to determine an individual's credit worthiness; that is, determining an individual's ability and track record of repaying a debt. The willingness to repay a debt is indicated by how timely past payments have been made to other lenders. Lenders like to see consumer debt obligations paid regularly and on time, and therefore focus particularly on missed payments and may not, for example, consider an overpayment as an offset for a missed payment.
There has been much discussion over the accuracy of the data in consumer reports. In general, industry participants maintain that the data in credit reports is very accurate. The credit bureaus point to their own study of 52 million credit reports to highlight that the data in reports is very accurate. The Consumer Data Industry Association testified before the United States Congress that less than two percent of those reports that resulted in a consumer dispute had data deleted because it was in error. Nonetheless, there is widespread concern that information in credit reports is prone to error. Thus Congress has enacted a series of laws aimed to resolve both the errors and the perception of errors.
Commercial credit reporting
Commercial credit reporting is the maintenance and reporting of credit histories and risks for commercial companies.
While most people are familiar with consumer credit reports many are unaware that a similar reporting system exists to assess risk in extending loans to businesses, insuring businesses, underwriting insurance risk, purchasing businesses, investing in businesses and most of all in shipping goods to business on credit terms.
Government departments are also large users of commercial credit for regulating businesses and in collecting taxes.
Every country in the world has commercial (or mercantile) credit reporting agencies, if for no other reason than to allow foreign exporters to asses the risk in shipping goods to a wholesaler in that country. They can be large public corporations like U.S.A. headquartered, Dun & Bradstreet Inc. (traded on the New York Stock Exchange, established in 1842) with thousands of employees and offices and correspondents around the world. A recent development in commercial credit reporting is Cortera – which combines data reporting comparable to Dun & Bradstreet , but which also runs an online community in which businesses put up online ratings on if/how/when they get paid by their own customers and suppliers (ratings visible to other community members. They can also be small one man operations serving a limited number of local and foreign clients in a small country.
Before telephones and the internet, the only way to gather risk information on a business was to visit the business owner at their place of business. Credit reporters would ask the owner for the names of the companies that supplied them on credit terms, what banks they dealt with and detailed questions about number of employees, what was sold, etc. They would then contact these suppliers and banks for reference information. It took days, even weeks, to fulfill a request for a commercial credit report.
While most people are familiar with consumer credit reports many are unaware that a similar reporting system exists to assess risk in extending loans to businesses, insuring businesses, underwriting insurance risk, purchasing businesses, investing in businesses and most of all in shipping goods to business on credit terms.
Government departments are also large users of commercial credit for regulating businesses and in collecting taxes.
Every country in the world has commercial (or mercantile) credit reporting agencies, if for no other reason than to allow foreign exporters to asses the risk in shipping goods to a wholesaler in that country. They can be large public corporations like U.S.A. headquartered, Dun & Bradstreet Inc. (traded on the New York Stock Exchange, established in 1842) with thousands of employees and offices and correspondents around the world. A recent development in commercial credit reporting is Cortera – which combines data reporting comparable to Dun & Bradstreet , but which also runs an online community in which businesses put up online ratings on if/how/when they get paid by their own customers and suppliers (ratings visible to other community members. They can also be small one man operations serving a limited number of local and foreign clients in a small country.
Before telephones and the internet, the only way to gather risk information on a business was to visit the business owner at their place of business. Credit reporters would ask the owner for the names of the companies that supplied them on credit terms, what banks they dealt with and detailed questions about number of employees, what was sold, etc. They would then contact these suppliers and banks for reference information. It took days, even weeks, to fulfill a request for a commercial credit report.
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