In today’s business climate, organizations are expected to extend credit to their customers, as it enhances purchasing power and creates opportunities that may not have been available otherwise. However, offering credit is a balancing act for most businesses, as just one late payment or customer insolvency can put stress on an organization’s cash flow and profitability.
Thankfully, businesses can protect themselves using trade credit insurance.
Trade credit insurance—also known as credit insurance or export credit insurance—is a form of insurance that transfers risk for businesses seeking to protect their accounts receivable against non-payment. To better understand the coverage and its uses, it’s important to review some frequently asked questions (FAQs) regarding trade credit insurance.
What is Insured?
Trade credit insurance is designed to protect businesses against the risk of non-payment of goods or services by their buyers—whether it be for a domestic or international sale. In essence, policies protect against non-payment as a result of buyer insolvency or non-payment after a predetermined number of months after the due date.
The following risks can be insured under trade credit insurance:
- Non-payment or late payment
- Customer bankruptcy, insolvency, or similar legal status
- Non-payment following an event outside the control of the buyer or seller
It should be noted that insured risks must have a direct link with the delivery of goods or services, otherwise they are not insurable.
What is the Goal of Trade Credit Insurance?
For insurers, the goal of a trade credit insurance policy is not only to indemnify losses as they arise, but also help businesses prevent foreseeable losses from occurring in the first place. To meet this goal, insurers provide businesses with services to help strengthen their credit management practices.
Most trade credit insurers offer their policyholders some or all of the following services:
- Proactive monitoring of a business’s customers to ensure their continued creditworthiness
- Up-to-date country reports that detail the potential risks for conducting business in foreign markets
- Management of outstanding receivables using complex financial solutions
- Proactive debt collection procedures
Can I Insure a Buyer Based in My Own Country?
Yes. A domestic credit insurance policy will address any payment risks created by local buyers. Such policies typically have low premium rates and a relatively simple structure.
What is Political Risk?
Political risk often refers to things like war, terrorism, riots, or actions by local governments (e.g., changing import or export regulations suddenly). In relation to trade credit insurance, political risk is an event or situation that is outside you or your buyer’s control and obstructs the payment or delivery of goods.
Typically, trade credit insurers that protect against export risks will also offer political risk coverage.
Are Trade Credit Insurance Policies Standard or Tailor-Made?
Trade credit insurance policies are drafted to suit specific needs. Standard policies do exist and can be particularly useful for small and medium-sized enterprises.
How do Credit Limits Work and What is Their Value?
During the underwriting process, insurers analyze the financial stability of a business’s customers. Each of these customers are then assigned a credit limit, which is the amount the insurance company will indemnify if the customer fails to pay.
Unlike other forms of insurance, these coverage limits can change during the policy period. The insurance company has the right to reduce or cancel a granted limit at any time, usually as a result of negative information. In other instances, a business can request additional coverage of specific buyers should the need arise.
How Much Does a Trade Credit Insurance Policy Cost?
A common misunderstanding is that only a few options are available (like EDC) when in fact there are over eight insurers providing trade credit insurance. Their terms can vary widely as can the risks they cover.
Typically, trade credit insurance is priced on standard actuarial techniques. It is sold mostly on a whole turnover basis, and premium rates are generally given as a percentage of the company’s turnover.
Learn More About the Benefits of Trade Credit Insurance
Contact Aaron MacFarlane at Lawrie Insurance Group by phone at 1.800.661.1518 x1422 or email firstname.lastname@example.org to discuss your risk management strategy. LinkedIn: Lawrie Insurance Group – Manufacturing Specialty Group.
Ranked in the top 5% of independent brokerages in Canada, Lawrie Insurance Group is a privately owned and operated insurance brokerage with over 100 employees specializing in all areas of personal and corporate property/casualty insurance, employee benefits, financial services, and group retirement products.