In other words, the insurance policy covers the risk of loss caused by a buyer’s insolvency or by their defaulting on an agreed debt (credit sale).
That said, credit insurance is not just about having claims paid.
ACCESS TO INFORMATION
When it comes to the risk of loss from bad debts, informed decisions can be made on levels of credit provided based on the insurer’s review of that buyer.
The information held by a credit insurer tends to be more than publicly available financial information or filed accounts. They also have management accounts, details of payment patterns and records of previous defaults.
DEBT COLLECTION AND LEGAL SERVICES
Some insurers have their own debt collection and legal teams to assist with the recovery of monies owed. Depending on the insurer, this can be included as part of the policy, or fees are heavily discounted for the policyholder.
EARLY WARNINGS
When insured, the policyholder is usually informed about any negative information relating to their buyer, whether it is updated financials or poor payment performance to another insured buyer. This information is considered by most to be the second reason for obtaining and keeping a policy.
Credit insurance policies can cover one buyer, known as a single-risk policy. Some six out of seven buyers have a multi-buyer policy, or a whole turnover policy, which covers all credit sales above a predetermined excess level.
The level of credit sales expected in the policy period (estimated insurable turnover) is the main driver for pricing the premium but the level of bad debts in recent years – the main risks (the buyers and their credit limits) – impact the cost also. For an exporter, the countries sold to are also considered, especially if they are outside the OECD. Political risk cover can be sought in many countries, if required.
CREDIT INSURANCE IS NOT JUST ABOUT HAVING CLAIMS PAID
WHO ARE THE MAIN PLAYERS?
There are a number of credit insurers operating in Ireland, with Atradius, Coface & Allianz Trade (formally Euler Hermes) being the main three; others include Tokio Marine HCC, AIG, Credendo, Chubb, QBE and Nexus. Each offers different options but in general a policy can be tailored to the client’s trade, with the addition of varying modules to a basic policy structure, whether they are an importer, a wholesale or a transport business.
HOW DO I CHECK OUT MY OPTIONS?
Obtaining terms for a policy is easy: a simple one-page questionnaire is populated and given to an insurer, who assesses the risk appetite for the main buyers and then provides an offer of terms. Using a specialist broker for this can streamline the process and return a full market response.
A credit insurance policy can be assigned to an invoice discounter provider so that claims can be paid to them if they have funded against the debt. Some lenders insist on there being a policy in place before providing support for this type of funding.
Credit Insurance by its nature is designed to provide peace of mind, information, and bad debt protection but it can also provide structure and guidance to a credit function resulting in reduced debtor days and improving cash in a business. ✽
