Credit Insurance is a product designed to protect a business’s accounts receivable, generally the largest asset on a company’s balance sheet, against losses due to its customer’s financial inability to pay. Bankruptcy and slow payments are risks that can be covered with this product. Political risk insurance can also be provided to cover international accounts receivable.
Businesses that should consider receivable insurance are ones that would be adversely affected by an unforeseen catastrophic loss, are looking for sales expansion, have a concentration risk in the receivable portfolio, exporting or using their accounts receivable as collateral for financing.
The goal of credit insurance is to assist in the growth of a business by making informed credit decisions, by using the right information to help companies avoid catastrophic losses and maintain sustained profitability. Doing this requires an understanding of a business trade sector, normal business practices and the internal credit management policies. A credit insurance policy does not replace managements credit practices but supplements them.
There are multiple credit insurance companies that provide this coverage, utilizing two primary methods of underwriting. One group, Limits Underwriters, develop proprietary credit and financial information on businesses around the world. They employ trade and country specific risk analysts that research and evaluate specific buyer credit requests. They will approve, in whole or in part, or decline to provide, coverage on the insured’s credit request. Other carriers place greater emphasis on the insured’s credit management’s practices and procedures. The stronger the internal practices, the more discretion the insured has in the setting of the insured credit limit.
While most policies are structured to cover the entire portfolio of trade debt other options such as specific segments, key accounts or single debtor coverage are also available.
Understanding what is available in the credit insurance marketplace is important in the buying decision. Understanding what is best for your needs is critical to the buying decision.