Credit Insurance for Securing the Bottomline and Business

17 January, 2020
5 min read
Agniv Ghosh,
Linkedin profile

What you'll learn

  • Learn the key benefits of credit insurance.
  • Learn the 6 best practices to leverage credit insurance accurately.
  • Establish coherent alliances with an expert insurance broker to mitigate credit risks.
  • Establish legitimate credit policy terms that yield indemnity.
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    The Need For Credit Insurance

    In today’s business landscape, credit insurance helps to protect your business against the unexpected commercial and political risks that exist in most economic sectors. Credit insurance on the top of your credit management software is a valuable protection that will give you confidence while managing your customers. The first line of defence is better information and understanding the risk, some of which we would be closely examining. But first, let’s take a look at what exactly is credit insurance and how your company can leverage the most out of it.

    About Credit Insurance

    Credit insurance is a risk management tool that insures suppliers against buyer non-payment. There can be a variety of reasons why your buyer can’t pay within the payment term. The reasons can be broadly distributed into two categories viz: Commercial and Political reasons.

    Some commercial reasons include:

    • Insolvency of the buyer.
    • Inability or refusal to pay undisputed debts.

    Some political reasons include:

    • Due to the buyer’s government, which may result in confiscation, expropriation, and nationalization.
    • Currency inconvertibility.
    • Hostile actions against export or import.
    • War and civil disturbance – exclusions might apply per country.

    Now the question arises, how does Credit Solution really work?


    Credit Insurance prevents businesses from bad debts and customer insolvency. The products or services are sold on credit by the seller whose payments are being insured by the Credit Insurance Solution.

    Let’s learn about the key aspects that need to be kept in mind before choosing the right policy:

    • Evaluate and quantify your risk: analyze and adapt.
    • Determine how much risk you want to maintain and how much of it you can’t control.
    • Determine how much premium you are actually willing to pay.
    • Structuring policies with keeping deductibles and/or co-insurance risks in mind.
    • Find a good broker to represent you.
    • Establish a good relationship with your insurance carrier.
    • Implement and maintain credit procedures.

    Once all these basic points are taken into account, choosing the right insurance policy becomes hassle-free. Let’s look at some of them:

    Popular Types Of Credit Insurance Policy

    • Short-Term Multi-Buyer:
      They are structured to cover all or the majority of a company’s sales. It also covers a broad spread of risk but not exceeding 360 days.
    • Short-Term Key Account:
      They are structured to insure a select group of buyers sharing similar characteristics primarily – geography, industry, or strategic customers.
    • Short-Term Single Buyer:
      Such coverage only applies to A/R owing to one specific buyer. Such policies are used to support ongoing sales for 1 year or for one-off transactions.
    • Medium Term:
      It covers for A/R within payment terms > 1 year but < 7 years. Typically single buyers are insured but coverage on a portfolio of customers is possible.

    Since the implementation of the credit insurance solution can be complicated, here are the 6 steps which will guide you through the process.

    Six Best Practices To Leverage Credit Insurance

    Let’s have a look at the blueprint before getting into the details:

    Step By Step Analysis

    #1 Find an Expert Broker/Partner

    It is necessary for the broker to understand your company and terms. Once they understand your customers, industry, sales, and payment terms, they can easily negotiate the best combination of cost and cover for your business.

    They will be able to:

    • Generate different insurance options.
    • Make you fully aware of the responsibilities as insured.
    • Regularly review cover to respond to changes in market and circumstances.

    #2 Develop Credit Policy Terms Which Best Fits Your Needs

    Following are the key policy characteristics to evaluate:

    • Policy Period: The specific period (usually 12 months) when risk attaches to a policy. This usually applies to either when shipments are made or when accounts receivables are due. Policy terms of up to 5 years for capital goods.
    • Policy Limit of Liability: The maximum amount payable by the insurer for all eligible losses incurred by the insured during the Policy Period.
    • Indemnity: Policy coverage is typically between 80-95% indemnity.
    • Discretionary Credit Limit: The amount of credit a policyholder can extend to a customer in accordance with their credit procedures. The level of credit may also be based on favorable prior trading experience.
    • Deductible: The amount of loss the policyholder must absorb for their own account before losses are paid by the insurance company.
    • Maximum Terms of Payment: The maximum credit terms the policyholder can extend to a customer.
    • Insured Percentage of Coverage/Co-Insurance: The percentage applied to each loss after the deductible has been absorbed by the policyholder.
    • Specific Transactions Covered: Business specifics that need to be addressed as a part of the policy.

    #3 Make Your Insurer An Ally

    A relationship is always an essential element in business whether it is with a customer or collaborators such as those with the insurer.

    There are some basic methods to implement and build a stronger relationship with the insurer:

    • Get the insurer to know your customer relations.
    • Keep them aware of the developments in your company, business, and customer’s situations.
    • Discuss alternatives to mitigate the customer’s risk.

    #4 Ensure Strict Compliance With Insurance Policy Terms And Conditions

    Insurance policies have numerous terms and conditions which can sometimes go against your company policies. Hence, it is very necessary for both parties to have a thorough review and compliance with the set insurance policies.

    Once the insurance policy is issued, the insured has three basic duties:

    • To pay the premiums.
    • To notify the insurer if an event occurs that gives rise to a claim.
    • To cooperate during the litigation.

    #5 Get The Right Price

    Pricing is complex and often not set in stone. Therefore, it is necessary to review the policy statements carefully before fixing a deal. The overall insurance pricing is based on your risk level, premium services, and broker’s fees. Your risks are measured based on the business industry, customer ratings, loss history, and geographical location.

    Make sure that you also ask about any brokers’ fees that will be added to your premium and review fixed costs which could be as little as $150 – $500 per transaction or could go up to a thousand dollars.

    #6 Partner – But Be Careful

    In the business world, there is a high risk of fraud and deception; henceforth while making partnerships with the insurer, ensure to make a proper background check and contract signing of all the clauses.

    If the company relies totally on the insurer for its credit risk analytics, the insurer might decline ‘good’ companies which will result in the loss of both perfectly good sales and leads to suffering higher claims. Furthermore, it might increase future premiums. It could be particularly important if sales are industry-specific, in which case the company might have a better knowledge of the industry than the insurer.

    The company should have efficient communication channels between the Broker and the Insurer. However, the company should be ready with a proper contingency plan if unfortunate circumstances arise.

    Credit Insurance As A Prime Utility

    “I would say that the key benefits is the simplicity. Once you have the insurance program in place in your company, it’s pretty easy to get the coverage for your sellers.”

    -Santiago Tomasi | Senior Credit Manager, The Mosaic Company

    Key benefits of Credit Insurance:

    • Risk Management: Prevents a business from several kinds of risks such as reducing bad debt reserve and catastrophic losses.
    • Revenue Growth: By entering new foreign markets, export sales are increased.
    • Financing: Provides collateral for creative financial solutions.

    Go through the following chart for detailed benefits:

    Leveraging Credit Insurance

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