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What Is The Difference Between Risk Participation Agreement And An Insurance Contract? |
As part of their business operations, some Export Credit Agencies tend to use insurance contracts to provide cover for identified commercial & non-commercial risks related to Letters of Credit issued by banks in developing countries.
Some confirming banks are accepting such documentation tomitigate the underlying risk; however, other banks seem to insist on using Risk Particiaption Agreements instead, which are more or less subject to the same conditions.
| Answer: There is a WORLD of difference. An insurance contract is, well, an insurance policy! The company issuing the policy, theoretically, has money behind them to pay claims, and is subject to insurance and banking laws in their state. If they are admitted to do business in your state, then your state actually has a guarantee fund, in case they go bankrupt, to pay your claims. A "risk participation" agreement, is just a pool of people who don't have insurance, who agree to SHARE CLAIMS PAYMENTS. There is no guarantee that there will actually be any money at the time your claim needs to get paid. Also, not only do you pay in your share, but if claims are abnormally high, |