Trade credit insurance can help protect companies from a customer’s default as a result of insolvency, slow pay, and other credit and political risks. With the proper credit insurance to protect receivables, you can offer buyers attractive terms, enabling you to seize more global opportunities while protecting the balance sheet. A larger company may be able to survive, but the cost from even a single default could severely damage its bottom line. For a small or midsize company, the impact of one or more customers defaulting could be devastating.
Trade Credit Insurance can enhance credit risk management by using the credit information, risk monitoring and debt collection services provided by insurers. The use of credit limits, underwritten by insurers, helps an insured monitor its debtor risk. This helps the company manage its sales policy by enabling it to focus on creditworthy customers, appropriate payment terms and security conditions. Trade Credit Insurance claims payments improve cash flow uncertainty.
Trade Credit offers whole turnover insurance, to cover all eligible business transacted within an agreed period — usually 12 months. Underwriting control is exercised primarily through a credit limit set for each buyer covered. Business owners have discretion to set limits for many of their customers based on their credit and collection procedures.
The level of indemnity is high — usually 80% to 95%, with some underwriters giving a higher percentage of cover for vetted customers as compared to discretionary limits. Premium is payable as a percentage of insured turnover, which must be declared monthly, quarterly, or annually. Whole turnover policies can be based upon domestic or export trade, or a combination of both. Underwriting is based on previous loss records, future turnover and trade expectations, and the quality of customers.
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Trade credit insurance policies can be highly customized to provide the right coverage for a company based on its operating model, industry, and geographic footprint. For example, a policy can be structured to provide coverage for:
- All a company’s receivables (whole turnover).
- A select list of accounts for which a company perceives the greatest risk (key account structure) — for example, its largest customers.
- Receivables from one customer (single debtor).