Tailored measures to support service trade

China’s service trade is flourishing, and insurance must adapt to keep up. From animation exports to aircraft maintenance, SINOSURE is crafting innovative solutions to overcome unique challenges and empower Chinese service businesses on the global market.

As a pivotal indicator of high-quality trade development and a key link to move up global value chains, service trade is gaining momentum. According to the World Trade Organisation, service trade presently accounts for more than 20% of total global trade, and the ratio is projected to increase to 50% by 2040. SINOSURE supports service trade through all its products lines. At present, cover has been mainly provided for internet advertisement, international logistics, and maintenance; meanwhile, business in design, information and communication, film and animation, and testing is also on the rise. Since the beginning of 2020, with the slowdown of world economic growth, the pandemic, and the emergence of regional geopolitical conflicts, demand for export credit insurance from service trade has continued to grow.

Compared to tangible goods trade, service trade, by its unique nature, brings certain challenges to underwriting. For example, most of the buyers have a shorter history with limited asset sizes. The lack of unified standards for patents and digital assets evaluation makes it difficult to meet the limits requested by the exporters. Further, service is always continuous, with multiple links and due dates for which the starting points of insurance liabilities are hard to define. This creates ambiguity in the coverage of credit period as well as the validity period of both policies and limits. Finally, service trade concerns a wide range of industries with complex contractual rights and responsibilities and multiple payment modes; traditional products cannot perfectly match with these industrial characteristics.

To better serve the evolving needs of the market, SINOSURE takes innovative measures and constantly enriches its toolbox to offer tailor-made solutions for service trade enterprises.

Clarifying the starting point of liability to support animation export

A Chinese animation film Company A exported episodes to a foreign TV Company B which was authorized under a contract to play the episodes. However, the contract only contained the authorised elements, the payment due dates of three installments, and did not specify the delivery profile, the value of each authorised element, or the corresponding element for each installment. This meant that the starting point of liability, the amount of each claim, and the credit period of each installment were unclear.

Following discussion with the insured party, SINOSURE split the authorisation of the characters, script copyrights, scene and prop images under the contract, and specified the corresponding contract amount. The date on which Company B provided a confirmation letter after receiving the authorised elements was set as the starting point of Company A’s claim. The interval between the starting point of the claim and the due date of each installment was defined as the credit period. Meanwhile, Company A issued a note in writing to SINOSURE that the amount, the starting point, and the credit period of each claim had been clearly defined. With SINOSURE’s support, Company A successfully obtained financing from the banks.

Special clause to serve the needs of aircraft maintenance clients

In the aircraft maintenance sector, maintenance enterprises manage payment risk by controlling the balance of accounts receivable from airlines, i.e., even if an airline company is obviously overdue, the maintenance enterprise will continue to provide services and deliver the engines as long as there is a credit limit balance under the airline company’s account. However, according to the terms and conditions of SINOSURE’s policy, if the insured party continues to provide services to the buyer despite knowing the potential risk (e.g., breach of the trade contract or expected breach of the trade contract), the loss suffered should be regarded as exclusions. As the above business model of the maintenance company will trigger the exclusion clause, there is a gap between the existing product and the needs of the client.

In response to such needs, SINOSURE conducted a comprehensive analysis of the business risks of airlines, risk control measures of maintenance enterprises, and overall risks of the aviation industry. It was concluded that aircraft engines, as core components, had high technical content with high-quality buyers, and the overall risks were therefore controllable. After a discussion with the insured, SINOSURE made an adjustment to the definition of buyer’s default in the policy through a special clause. With this adjustment, a longer grace period was given to the airline company, and the company was also urged to restrict its habitual deferred payment within the grace period. In this case, SINOSURE managed to strike a balance between serving the needs of its customer and respecting existing industrial practices, thus demonstrating its commitment to supporting high-tech and high value-added service sectors by introducing credit insurance to the aircraft maintenance industry.

New tailored solution for app developers in digital trade sector

Fueled by the rising smartphone penetration and diversifying user needs, Chinese app developers are increasingly interested in overseas markets. This expansion, in turn, has led to a growing demand for insurance against the risk of collection from cross-border application service platforms like Google Play and Aptoide. In practice, the app developer signs an escrow service agreement with the platform, which is responsible for marketing and providing download services to end users. The end users pay the fees incurred in the process of downloading or using the apps to the platform. The platform pays the receipts to the app developers after deducting a certain percentage of commission. However, there are certain differences between the escrow service agreement and the conventional sale-purchase trade contract supported by SINOSURE. It is essential to design a tailored solution for this special business scenario.

Following extensive market research and legal consultations, it was concluded that the escrow service agreement establishes a clear debtor-creditor relationship for the accounts receivable. This clarity allows for the underwriting of the associated risks in accordance with standard credit insurance principles.

A special product for platform payment risk to serve these unique needs was launched. The insurance liability starts from the completion of payment by overseas end users for the expenses incurred by downloading or using the application through the cross-border e-commerce platform. It terminates at the payment made by the cross-border e-commerce platform as stipulated in the contract. The policy covered the loss of payment that should be made by the cross-border e-commerce platform enterprise to the app developers due to political and commercial risks. Meanwhile, the sales records of the platform were used as an important basis for clarifying debts and losses ascertainment. In this case, SINOSURE provided credit risk protection for app developers in their overseas market expansion.

Looking ahead

In recent years, the world is seeing a trend of new forms of service trade and digitisation. In China, for example, artificial intelligence, and emerging fields such as smart logistics, telemedicine, and online exhibition are flourishing due to accelerated innovation in big data, cloud computing. These new types of business models call for innovation from credit insurers. SINOSURE will closely follow the development of service trade as well as digital technologies, improve its underwriting and claims settling measures based on solid and forward-looking research, and remain committed to providing enriched solutions, the latest modes of support, and sufficient risk capacity for its clients.