Credit Insurance Products
What is Trade Credit Insurance
An insurance product that indemnifies a supplier against losses from default on commercial trade receivables. The default may arise from insolvency of the buyer, slow payment of the buyer or political events in a foreign buyer’s country.
Trade Credit Insurance usually provides the following integrated services:
Receivables insurance is offered by a limited number of insurers. 85% of the trade credit insurance global market is dominated by 3 international insurers – Allianz Trade (Euler Hermes), Atradius and Coface.
Typically, trade credit insurance let you transfer 90% of the non-payment risk to the insurer.
Whole Turnover
Whole turnover policies are by far the most common ones on the market. They work with the following premises about the insured supplier:
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No intention to invest in a sophisticated credit management process and an independent credit management team.
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Collection of receivables above a reasonable overdue period is preferably outsourced.
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Buyer monitoring is appreciated, and it is acceptable to get cover adjustments based on the buyer’s financial and payment performance.
Whole turnover policies cover all credit sales of the supplier (excluding those on letter of credit payment terms). During the buyers assessment some buyers can be excluded by the insurer, because they are very risky – either in terms of financials or payment performance (or both).
Those policies are suitable for wide range of companies and are priced very reasonably as risk is diversified between the whole portfolio of the supplier.
Named Buyers (Top Buyers)
Named Buyers trade credit insurance policies are intended to cover a pre-defined set of buyers – usually the largest ones, leaving smaller buyers out of the credit insurance policy scope.
This insurance product covers buyers which concentrate the major share of the supplier’s receivables, i.e. protection against catastrophic losses arising from customer failure. The policies can even be structured with non-cancellable limits, usually, if the supplier offers large insurable turnover and is willing to carry a substantial additional deductible.
Be prepared to actively participate in requesting financial and other information from the buyer.
Single Buyer
Single Buyer trade credit insurance policies are intended to cover open account invoices from just one debtor. As there is no diversification, tier-1 insurers are only willing to underwrite insolvency and protracted default risk of buyers with good financial standing and good reputation.
Usually the target limits of liability (and Credit Limits) start at 5 million EUR, as the challenge is either the requested Credit Limit amount to be sufficient and/or the buyer to demonstrate acceptable financials and reputation.
Be prepared to actively participate in requesting financial and other information from the buyer.
XoL
Excess of loss policies are intended for companies with a credit management process that can be shown in practice and approved by the credit insurer. Often, they are stripped of the additional services offered by the main insurers (buyer monitoring and mandatory collection service provider).
Policy can be structured on a whole portfolio basis or on key buyers basis.
XoL policies can provide much higher discretion of the insured to set Credit Limits appropriate to the business. These policies are generally with non-cancelable Credit Limits. Also premiums can be lower and in the same time insurer’s liability can be higher than traditional offerings.
The tradeoff is that the insured company should take a preset amount of loss on it’s own books (deductible) before the policy starts to pay. Thus, these policies are generally intended to cover catastrophic losses.