Trade Credit Insurance Overview
Accounts Receivable typically represents 40% of a company’s assets and is often more vulnerable to loss than a company’s land, buildings, machinery, equipment or inventories. While more prevalent in Europe, Trade Credit Insurance is an increasingly popular way for companies to protect against unexpected changes in the business cycle. The traditional business credit insurance policy protects a company from catastrophic bad-debt loss due to nonpayment, slow payment or insolvencies due to commercial and/or political risks.
Additional Benefits Include:
-Stabilizes cash flow by capping bad debt exposure
- Supports and enhances credit analysis with evaluations of customers, prospects, industries and countries
- Provides structure and discipline for credit decision making
- Allows for companies to more safely expand into new markets
- Enhances banking relationship with asset based lenders
- Additional funding may be available at reduced rates
- Facilitates borrowing against export receivables
- Reduces risk associated with a sole/ large customer concentration
- Frees up working capital
- Converts non-taxable/deductible bad debt reserves into a fully tax deductible insurance premium
- Reduces collection costs
Frequently Asked Questions:
Q: What trade terms can be protected?
A: Business trade credit is for trade receivables with a term of one year or less.
Q: Are there any sales minimums?
A: Practically speaking, annual sales of at least $1M are needed to make the program cost effective.
Q: Can I cover just the accounts I am worried about?
A: The coverage was designed to provide protection for unforeseen or unanticipated losses. Adverse selection works against the long-term viability of the coverage and consequently most underwriters require that coverage contemplate the entire A/R portfolio.
Q: How much does credit insurance cost?
A: Premiums are calculated as a % of sales. The rate generally ranges between 1.5 to 3 basis points, depending on the trading
history and historical debt loss of your company and your trade sector.
Q: Can coverage be extended to cover loss due to Political Risk?
A: Yes, for an additional premium.
Q: Is there a deductible or co-insurance provision?
A: Varies by Account – A 10% coinsurance percentage is typical but both vary based upon underwriting and the risk tolerance of the insured.
Q: How quickly are claims paid?
A: Generally, a domestic claim will be paid within 60 days. Export losses take a little longer due to certain waiting periods imposed by the laws of some foreign jurisdictions. Export losses due to insolvency are the exception and are paid within 60 days of the loss.
Q: What is the difference between Credit Insurance and Factoring?
A: Credit Insurance responds to both slow pay & insolvency.
Q: What documents are required to get a Credit Insurance quotation?
A: Completed Credit Application, including a current summary of aging. Please note financials are required for all individual credits greater than $250,000.
For more information, contact:
Drew Gunn
Vice President, Practice Leader
Oswald Specialty Risk Services, LLC
216-367-3286