Documents to insure the risk of loan non-repayment. Credit and legal risks of the borrower and its guarantors. What to do if an insured event occurs
The most common way to ensure loan repayment is to insure the risk of loan non-repayment. The contract is governed by the provisions of the Civil Code of the Russian Federation, namely Article 929 “On Property Insurance”. Although the law does not stipulate a mandatory rule on compulsory loan insurance, such a requirement can be put forward by the creditor bank.
What is the object of insurance?
When insuring the risk of non-repayment of a loan, the creditor bank is the insured. The object of insurance is the responsibility of the borrower (or a group of persons) to repay the loan amount received from the bank, taking into account all accrued interest and other due payments, limited in time. Simply put, if a borrower (a group of borrowers) fails to fulfill its loan obligations to the lender, the insurance company will compensate the bank for all losses incurred. The percentage of insurance compensation for unfulfilled obligations varies between fifty and ninety percent of the amount of all unfulfilled obligations (including interest due on the loan).
It is mandatory that the percentage of insurance compensation be stipulated in the preliminary approval of the insurance contract. After all, the amount of the insurance tariff (premium), which will subsequently be transferred by the bank to the insurer, will depend on it. It is also possible to insure the risk of loan non-repayment, in which the insurance compensation covers one hundred percent of the loan funds, but without taking into account the accrued interest due under the loan agreement.
What is the insurer responsible for?
The insurance contract obliges the insurer to assume responsibility for the borrower's failure to fulfill obligations to the creditor bank upon the occurrence of an insured event. An insured event is a loss incurred by the policyholder due to the borrower's failure to repay the amount of loan funds, as well as failure to pay interest due during the use of the loan.
The insurer is responsible for compensation of insurance compensation from the moment the insured event occurs until the borrower is declared bankrupt, but not more than five years after the expiration of the period for the fulfillment of loan obligations by the borrower.
The insured event is considered to have occurred after the bank has not received payment (along with interest) from the borrower within twenty days after the loan repayment period.
What does the insurance premium depend on?
The insurance premium (tariff rate) directly depends on a number of factors:
- Conditions for insurance of the risk of loan non-repayment;
- Insurance period;
- Parameters of the insured loan (amount, interest rate);
- Type of loan security (collateral, guarantee);
- Risk level (calculated by the insurer independently);
- Assessment of the borrower's solvency.
Increasing or decreasing coefficients are applied to insurance premium tariff rates. The policyholder submits a written application to the insurer to conclude an insurance contract, simultaneously providing a copy of the loan agreement, a certificate of calculation of loan payments, as well as a plan for using loan funds. After a thorough assessment of the degree of risk, the insurer calculates the amount of insurance premiums, which are paid in a lump sum.
What to do if an insured event occurs?
Within three days, the policyholder must notify the insurer of the occurrence of an insured event (incident) by submitting a written application with an attached loan agreement, under which the loan was not repaid.
The insurance company prepares a statement of non-repayment of the loan. It is compiled together with the head of the bank (beneficiary), the borrower (or his representative) and invited independent experts. The amount of the insurance payment will depend on the level of responsibility of the insurer. After the insurance company pays the insurance compensation in favor of the creditor bank, all rights under the loan agreement pass to the insurer. This process is called subrogation. To implement the recourse, the bank is obliged to transfer all necessary documents to the insurance company. Insurance compensation may be reduced in amount, or not compensated at all, if subrogation cannot be made due to the fault of the creditor bank. For example, this is possible if the statute of limitations for filing a claim is missed.
The insured may also be denied payment if during the proceedings it becomes obvious that fraud, misuse of the borrowers' loan funds, or submission of false data about the reasons for non-repayment of the loan.
All disputes arising, both under the loan agreement and under the insurance agreement, are considered within the framework of the arbitration court for legal entities and the civil court for individuals.
The object subject to insurance against the risk of loan non-repayment is the responsibility of all or individual borrowers to the bank for timely and full repayment of loans and interest on loans within the period established in the insurance agreement. The policyholder is faced with a choice: to insure the amount of the loan issued with interest or only the amount of the principal; insure the liability of all borrowers to whom loans were previously issued, or the liability of each individual. As a rule, in modern Russian conditions of unstable economic situation, it is advisable to insure the loan amount with interest for each borrower separately. However, one should take into account the fact that when insuring all loans, automatic liability of the insurance organization is achieved and a preferential tariff rate is established under such contracts.
An insurance contract for the risk of non-repayment of loans is concluded between insurance companies (insurers) and banks and other credit organizations (policyholders). Under the insurance contract, the insurer pays the policyholder compensation in the amount of 50 to 90% of the amount of the loan not repaid by the borrower and interest on it.
Thus, the insurer's share of participation in compensation for losses is provided in order to reduce the bank's responsibility when checking the solvency of the borrower in the process of processing, issuing a loan and further monitoring the financial and economic activities of the debtor.
The insurer's liability arises if the policyholder has not received the amount stipulated by the loan agreement within a certain time after the payment deadline stipulated by the loan agreement or the deadline established by the bank if the borrower fails to comply with the terms of the loan agreement.
The insurance amount is established in proportion to the percentage of the insurer's liability determined in the insurance contract based on the entire amount of debt to be repaid under the terms of the loan agreement. When insuring the risk of non-repayment of loans for all borrowers, the insured amount increases by the amount of loans issued after the conclusion of the insurance contract, if the policyholder pays insurance payments on these loans. In this case, the insured amount is determined based on the amount of debt as of a certain date, excluding loans with overdue debt.
The insurance period for the risk of non-repayment of individual loans is established based on the timing of repayment of loan amounts. When insuring all issued loans, the loan non-repayment risk insurance contract is concluded for one year.
The tariff rate depends on a number of factors:
1) term of use of the loan;
2) the loan amount and the interest rate;
3) level of risk;
4) type of security.
In each specific case, the tariff rate is determined by the insurance organization. In accordance with the conclusion of experts who determine the final degree of risk, when setting the rate, it is possible to use decreasing or increasing coefficients. When using the appropriate adjustment factor, the tariff rate is determined by multiplying the base rate by the coefficient.
Before concluding an insurance contract, the insurance company carefully studies the submitted documents in order to determine the availability of guarantees for the return of funds by the borrower on the loan received and to ensure the financial stability of insurance operations. If it is determined that the loan is issued without sufficient guarantees, the insurer may set a higher tariff rate, or even refuse the bank to enter into an insurance contract, or set a period after which the credit institution is obliged to return to the insurer an amount equal to the balance of the borrower's debt on the loan. contract in accordance with the special terms of the insurance contract.
The insurer, on the basis of the submitted documents, calculates insurance payments for each borrower individually and as a whole under the insurance contract based on the amount of outstanding debt and established tariff rates. Insurance payments on short-term loans are paid in a lump sum; For long-term loans provided as a lump sum, the annual amount of payments is paid in one or two terms. If the policyholder enters into an agreement to insure the risk of non-repayment of loans on issued loans, then insurance payments can be paid either at once or in two terms.
The most significant points in insurance are the amount of liability assumed by the insurer and the procedure for indemnifying losses.
When insuring loans, it is possible to accept 100% of the loan amount for insurance without taking into account interest payments. Very often, insurers, on the contrary, pay the policyholder compensation in the amount of 50 to 90% of the loan with interest on it.
When an insured event occurs, the policyholder is obliged to notify the insurer of the incident within three days by submitting an application accompanied by the loan agreement under which there was non-payment, the payment schedule and other documents related to this agreement, as well as immediately take all necessary measures to repay the overdue debt.
Credit insurance
Lending operations are characterized by a high risk of non-repayment of loans, which necessitates the development of a credit risk management system. This system may include both measures taken by the lender itself to reduce the likelihood of non-repayment of the loan (assessment of the borrower’s creditworthiness, the profitability of the operation for which the loan is issued, obtaining liquid collateral, etc.), and external methods of reducing losses associated with credit operations. One of them is the conclusion of insurance contracts. The use of insurance in Russia as a way to protect against credit risks already has a certain history. Domestic insurers began concluding the first contracts of such insurance in the late 80s and early 90s.
They were associated with insurance of borrowers' liability for non-repayment of loans and insurance of the risks of non-repayment of loans issued by banks. Currently, ideas of using such insurance to reduce the risks of creditors are re-emerging. The period of the early 90s was characterized by the emergence of the domestic insurance market, when the Gosstrakh monopoly on insurance within the country began to gradually dissolve due to the creation of then very small, but very aggressive non-state insurance companies. In such a situation, the newly born insurers were ready to insure anything and against anything - just to receive at least some insurance premiums, with which they could pay salaries, pay rent, and purchase the most necessary property.
At the same time, they did not bother themselves with attempts to understand such issues that seemed to them to be purely theoretical, such as risks subject to and not subject to insurance, selection of risks for insurance, assessment of the degree of insurance risk, etc. At the same time, banks that had just begun to develop, often employing inexperienced personnel, realized what risks active banking operations associated with issuing loans were fraught with in a country with emerging market relations, crime, and specific concepts of business ethics. As a result, banks faced the problem of reducing credit risks. And then they remembered insurance, believing that by transferring these risks to insurers they would solve their problems.
Thus, the willingness of insurers to accept insurance for almost any risk from which policyholders need protection and the demand of banks for credit risk insurance have come together. What were the features of such insurance? Insurers insured almost any loans issued by banks, regardless of their purpose, collateral, or the solvency of the borrower. Insurers' assessment of the degree of loan repayment, the reputation of borrowers, and the effectiveness of credited activities was imperfect, if carried out at all. Insurers accepted loans under their responsibility in amounts that obviously exceeded their ability to pay insurance compensation at the expense of insurance reserves and capital, and insurance contracts were practically not reinsured.
On the other hand, banks did not pay enough attention to checking the creditworthiness of borrowers, believing that insurers would cover all losses. As it turned out, they did not think much about either the ability or willingness of insurers to fulfill their obligations. Legal services of banks were not always ready and able to understand the intricacies of insurance contracts, allowing them to be concluded on conditions that gave insurers the legal opportunity to refuse insurance payments. Finally, in order not to incur the costs of paying insurance premiums, insurers transferred to the borrowers themselves the responsibility to enter into insurance contracts and act as insureds in them, as a result of which a completely original option was born - insurance of borrowers' liability for non-repayment of loans. But after a few years, there was practically no such insurance in the country.
What happened during this time? As one would expect, some time after the start of the period of mass concluding credit insurance contracts, banks began to make numerous demands on insurers to pay insurance compensation for unreturned insured loans. However, insurers either did not intend to, or simply could not, satisfy the banks' claims on such a scale. As a result, the market entered into a long period of litigation between banks and insurers. At the same time, insurers often refused insurance payments quite rightfully, in accordance with the terms of concluded insurance contracts. Considering that such agreements were most often concluded by borrowers as insurers, and banks could only claim the role of beneficiaries, insurers had even more legal opportunities to try to refuse insurance payments.
The main arguments cited by the insurers were: untimely payment by the policyholder of regular insurance premiums, termination of the insurance contract before the occurrence of the insured event, misuse of the insured loan, untimely notification of the fact of the insured event, prolongation of the insured loan without the consent of the insurer. Both sides are to blame for this development of events. Insurers were too zealous in their desire to obtain maximum insurance premiums and were unable (or did not want) to realistically assess the degree of insurance risks under the contracts concluded and their ability to fulfill their obligations. Banks overestimated the ability of insurers to cover their professional risks, did not take into account the legal complexity of insurance contracts, and therefore paid for their desire to obtain insurance protection at the expense of borrowers.
With such a negative development of the situation in the field of insurance of lending operations, no insurance company will be able to insure correctly and reliably, and banks are unlikely to want to “step on the same rake” again. Consequently, the role of loan collateral is only increasing. The conclusion that can be drawn from this story is that it is hardly advisable to expect that with the help of direct insurance contracts against the risks of non-repayment of bank loans, the problem of reducing losses from non-repayment of loans can be solved. But the trade union of banks and insurance companies cannot be discounted. Insurance specialists are well aware of a number of types of insurance related to the issuance of loans by banks, which have been successfully carried out for a long time in developed countries. The peculiarity of these types of insurance is that, while protecting the interests of borrowers, they simultaneously guarantee the repayment of issued loans.
These types, in particular, are: - insurance of property taken by banks as collateral for issued loans; - life and health insurance for bank clients who received loans; - insurance of commercial loans. Let's take a closer look at the above types of insurance. One of the ways to guarantee the repayment of issued loans is to provide a loan secured by movable or immovable property owned by the borrower. To obtain a guarantee of the safety of the value of this property, it can be insured.
In this case, a collateral insurance agreement is concluded. The legal basis for such insurance is the obligation of the pledgor or pledgee, arising from Article 343 of the Civil Code of the Russian Federation, to insure at his own expense the pledged property against the risks of loss and damage in an amount not lower than the claim secured by the pledge. Thus, the insurers here, depending on the terms on which the loan is provided, can be both the lending bank and the borrower. Objects of insurance can be buildings, equipment, vehicles, raw materials, materials, finished products and other valuables provided to the bank by the borrower as security for the loan issued.
The insured amount may be taken as the value of the mortgagor's obligations to the creditor, but not more than the actual value of the insured property. The insurance risks here are usually the same cases that are provided for by the terms of property insurance against fire and other events (fires, natural disasters, water damage to property, theft, malicious actions of third parties, etc.). The right to receive insurance compensation from the pledge holder (bank) arises in the presence of two facts: on the one hand, complete or partial non-repayment of the loan received, and on the other hand, loss or damage to the pledged property as a result of the occurrence of an insured event during the validity of the insurance contract.
If the borrower repays the loan against which collateral was given, insurance compensation, if an insured event occurs, is paid to the owner of the property. When issuing loans to individual entrepreneurs or other individuals, life and health insurance contracts for the borrower may be concluded as security. This type of insurance is commonly called credit life insurance. The beneficiary under it is the creditor bank. The agreement is concluded for the period until the loan is fully repaid. The initial insured amount corresponds to the amount of the loan issued along with interest for its use. As the loan is repaid, the amount of the insured amount decreases so that at any time it is equal to the amount of the debt held by the insured.
This is convenient both for the borrower (since the amount of insurance premiums he pays is less than with traditional death insurance) and for the insurer (since the amount of his obligations decreases with each loan repayment period). In the event of the death of the insured or his loss of ability to work, the insurance payment provides the bank with repayment of the debt. A type of this insurance is life and health insurance of plastic card holders. Insured under this type may be holders of credit cards or cards that allow overdraft.
The insured amount is set at the maximum amount of the loan or overdraft. An insured event is the death of the insured or loss of his source of income due to incapacity for work. In this case, the insurer pays the bank insurance coverage in the amount of the unrepaid loan. Finally, when providing loans for the supply of products, banks may require borrowers to enter into commercial loan insurance agreements, which can be used as security for the borrower’s creditworthiness.
Under the contract of such insurance, the insurer undertakes to pay insurance compensation in the event of non-payment by the clients of the insured for the products supplied to them. The presence of a commercial loan insurance agreement increases the opportunities for policyholders to obtain bank loans, since in this case the risk of non-repayment by the borrower of the loan issued by the bank is reduced. In this case, the agreement can be concluded in favor of the bank that issued the loan against insured supplies.
What do Belarusian insurance companies offer to insure today in terms of consumer lending?
The list is approximately as follows:
· voluntary insurance of borrowers against accidents and illnesses,
· voluntary insurance in case of job loss,
· voluntary insurance of the risk of loan non-repayment.
When voluntarily insuring borrowers against accidents and illnesses, the object of insurance will be the property interests of the borrower associated with harm to his life or health.
With voluntary insurance of the risk of non-repayment of a loan, the property interests of a bank or other credit organization are insured. These are risks associated with the occurrence of losses due to the borrower’s violation of its obligations when making payments on the loan.
Moreover, the risk of losses caused by non-payment of interest for using a loan is not an object of insurance.
Let's turn to practice.
Suppose a certain Ivan Ivanovich Ivanov needs a certain amount to buy expensive household appliances, but at the moment he does not have the money.
"What to do?" - Ivan Ivanovich reflects nervously. The answer is obvious: “Go to the bank!”
Having familiarized himself with the offers of different banks, Ivanov thinks about the need to insure himself and his obligations. He does not want anyone close to him to pay money in case of any unforeseen circumstance.
Let's figure out what current life and health insurance programs for borrowers are offered by banks as representatives of insurance companies. And is this really beneficial for borrowers?!
Let's look at some suggestions.
Voluntary life insurance "Credit Special" (Rule No. 15), offered by Mego Policy, involves the following insured events:
· loss of the main place of work as a result of termination of the employment contract: during the liquidation of the organization, reduction in numbers, expiration of the employment contract, conscription for military service, etc.;
· disability of groups I and II, established for the first time (in previous insurance options, disability of group III was also taken into account);
· death of the insured during the insurance period.
The insured amount varies from 50% to 100% of the loan amount. There is a choice of insurance options: the insured amount can decrease during the insurance period in the manner and amount established by the insurance contract, or the insured amount does not change during the term of the contract, from 3 to 40 years.
Accident insurance offered by Belneftestrakh provides several insurance programs: “Garant”, “Standard”, “Friendly” in Belarusian rubles:
· "Guarantor" is issued for 1 person, the insured amount is 5 million rubles;
· “Standard” is issued for 5 people, amount from 10 to 20 million;
· "Friendly" - for 5 people, amount 20 million.
Insurance under the "Standard Plus" program is issued in foreign currency, the amount of insurance is: 3 thousand, 5 thousand and 10 thousand US dollars.
According to Article 929 of the Civil Code of the Russian Federation, any person (individual or legal) can insure their property interest. The borrower's obligations under the lending agreement can also be considered a property interest. Therefore, banks often insure loans provided to borrowers. What are the terms of lending? What can be considered an insured event? How should a credit institution act in the event of an insured event?
What is an insurance service?
Insurance of the risk of non-payment of a loan is an insurance agreement, where a credit organization acts as the insured, and the object of insurance is its property interest under one individual lending agreement or an entire loan portfolio. More often, banks insure each loan separately (if they consider it necessary). Portfolio lending is not so common, since due to its high cost it is not profitable enough for the bank.
When concluding a lending agreement, the bank’s property interest is recognized as the principal amount of the loan and the interest accrued on it. That is, the object of credit insurance includes 2 components: the principal amount and interest determined by the loan agreement. When concluding a contract, the insurer and the policyholder agree in advance on the limit of liability of the insurance company. It can be 50-100% of the total amount of the bank's property interest.
Insurance companies prefer to enter into an insurance contract not for the full amount of the bank's property interest. So they are trying to stimulate the credit institution to take independent steps to collect debt from the defaulter, since it is more profitable for the bank to receive 100% of the funds from the borrower than only 80% when contacting an insurance company. Credit institutions, on the contrary, prefer to enter into an insurance agreement for 100% of their property interest.
Features of concluding a contract
If it is necessary to insure a certain loan, the bank contacts the insurance company with an appropriate proposal and transfers the documents of interest to the insurer. As a rule, such documents include copies of loan agreements, copies of agreements drawn up to secure a loan (guarantee agreements or agreements for the provision of collateral), as well as documents indicating the solvency of the borrower. After receiving the documents, the insurance company assesses its risks and sets the amount of the insurance premium for the policyholder. This size is determined based on:
- General conditions of credit risk insurance;
- Duration of insurance (equal to the duration of the loan agreement);
- Terms of the loan (total amount and accrued interest);
- Type of credit collateral (collateral, guarantee, unsecured);
- Assessment of the debtor's solvency;
- Non-refund risk assessments (calculated by each insurance company using its own algorithm).
In advance, the insurer and the policyholder agree on what is an insured event and what is not. Most often, the insured event is the borrower’s untimely fulfillment or failure to fulfill obligations to repay the loan. That is, in case of late payments or their complete absence, the insurance company will have to compensate the bank for the damage. To protect itself from force majeure and some dishonesty on the part of the bank, the insurer can include several conditions in the contract, subject to which it will not pay insurance compensation. Thus, insurance compensation may not be payable if:
- The credit institution did not properly control the intended use of loan funds by the borrower;
- The credit institution committed certain intentional actions that resulted in the occurrence of an insured event;
- The insured event occurred as a result of military operations on the territory of the country (region);
- The credit institution previously waived property claims against the borrower, etc.
Each insurance company independently determines the list of conditions under which insurance compensation is not payable. If the insurance compensation was nevertheless paid, the concept of subrogation comes into force (Article 965 of the Civil Code of the Russian Federation). The bottom line is that when the balance of the loan is repaid by the insurance company, the right of property claim against the debtor is transferred to it. That is, the responsibility for repaying the debt is not relieved from the borrower, and if he previously owed the bank, he now owes it to the insurance company.
Actions of the bank upon the occurrence of an insured event
Within 3 days after the borrower is late in repaying the loan, the bank sends a statement to the insurance company about the occurrence of an insured event. A copy of the loan agreement is attached to the application. The insurance company, together with a representative of the bank and the borrower, draws up a statement of non-repayment of the loan, after which, within the prescribed period, the insurer pays the bank the amount of funds specified in the insurance contract. At the same time, according to Article 965 of the Civil Code of the Russian Federation, the right of claim of the lender against the borrower is transferred to the insurer.
The right of claim cannot exceed the amount of insurance compensation, regardless of the amount of debt remaining with the defaulter on the loan. If the insurance company repaid only part of the loan (did not repay it in full), then the borrower will owe both the insurer and the bank. If, after paying the insurance compensation, the bank also received funds from the borrower, it will have to transfer them to the insurance company. All disputes arising during the process are resolved in arbitration court (if all parties to the case are legal entities) or in civil court (if at least one of the parties is an individual).
Conclusion
Insurance against the risk of loan default is beneficial for the bank in that it allows you to effectively manage credit risk on loans with a high probability of default. Insurance against the risk of non-repayment of funds does not affect the debtor in any way. And even if the insurance company pays the bank a loan previously taken by the borrower, he himself will not be exempt from payments. Only instead of the bank, he will now owe the insurance company.