Credit Risk Insurance
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 and 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.
Trade credit insurance is purchased by business entities to insure their accounts receivable from loss due to the insolvency of the debtors. The product is not available to individuals. The cost (premium) for this is usually charged on Quarterly for Bigger Policy & single pay under small Policy, and are calculated as a percentage of Credit sales.
Trade credit insurance usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid as a result of protracted default, insolvency or bankruptcy. Policy holders must apply a credit limit on each of their buyers for the sales to that buyer to be insured. The premium rate reflects the average credit risk of the insured portfolio of buyers.
With trade credit insurance, you can reliably manage the commercial and political risks of trade that are beyond your control. Trade credit insurance can help you feel secure in extending more credit to current customers or pursuing new, larger customers that would have otherwise seemed too risky.
To analyse the credit worthiness and financial stability of company's customers - in particular, of their Cash Flows
Each customer has a limit which is the maximum amount we will indemnify if that customer fails to pay.
You trade with your existing customers as you wish, with the risk covered up to the limit.
The Trade Credit insurance provider will inform you the adjustments to limits as it might be raised or reduced when conditions change.
You check the credit worthiness of potential new customers and confirm agreement or explain if your request is declined.
If a customer fails to pay, then you give the Trade Credit Insurance provide with full information. We investigate and indemnify you for the insured amount if policy terms have been met.
YOUR BUSINESS CAN SUFFER, IF INVOICES ARE NOT PAID ON TIME
25% of bankruptcies are due to unpaid invoices
You grant payment terms to your customers every day. And because it’s a routine way of doing business, you may not be thinking about the risk you’re taking. But what happens when a customer defaults? When a business closes down? When a government suddenly forbids transfer of payments or declares a devaluation? You might have never experienced any of these situations before, but you ought to know that 25% of bankruptcies are due to unpaid invoices.
A CREDIT INSURANCE POLICY COVERS THE UNPAID CREDIT BALANCE FROM SALES MADE TO YOUR CUSTOMERS.
With credit insurance, your business is protected against losses from bad customer debt, which affords you greater peace of mind to focus on your company’s success. It is a type of business insurance which covers losses arising from non-payment for goods or services. It is a powerful tool that combines the information and protection you need to mitigate the risk of non-payment. If you have a loss on an insured account, you will be indemnified according to the terms of your policy.