Letters of Credit

A Letter of Credit is a letter from a bank guaranteeing that the buyer will make a correct and timely payment to the seller. If the buyer cannot make some or all of the payment, the bank will cover the outstanding amount. Actuaries calculate the outstanding losses, which can then be used to negotiate collateral (a letter of credit for example)! Depending on how credible the insured is, the collateral may need to be anywhere around 50% of outstanding (ok) or 100% of outstanding (bad).