Credit Insurance-What you need to know

Accounts receivable contribute a major part to the financial assets of many businesses.  But if your clients are not able to pay what they owe you, such credit losses can be a threat to the success of your business. There could be many reasons why your customers may not be able to pay or meet the credit extended to them. These could be:

·         Bankruptcy

·         Insolvency

·         Default

It could also be due to reasons beyond their control such as outbreak of war, riot, political or civil unrest that may block or delay payment for goods or services exported.  Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import of certain goods or on transfer of payments for goods imported.

This is where credit insurance can come to your rescue. This policy will cover a wide range of risks related to non-payments linked to trade that is both local and overseas. This insurance policy offers protection against default arising out of commercial, banking or political risks.

Such a policy provides protection from the risk of non-payment of commercial debts. It ensures these debts will be paid and allows companies to efficiently manage the commercial and political risks associated with trade which is beyond their control.

This policy is most suitable for businesses involved in selling goods or services on credit terms to domestic or foreign trade partners. An important aspect of credit insurance is that it is available only on a business-to-business model. The policy can also be taken to cover just a segment of the turnover or class of business. 

How does the policy work?

The nature of this policy is dynamic. Unlike property insurances where there are lesser changes till the renewal, this policy is liable to change during the policy period. The credit manager has a key role to play in this process. He is responsible for monitoring the credit worthiness of insured clients throughout the year.

Apart from this the insured may require additional coverage for specific buyers if required. Further information between the insured and the buyers has to be constantly updated and referenced. When a buyer experiences any financial difficulty all the sellers to that particular buyer are notified about the increased risk so that a plan of action can be devised to avoid or reduce losses.

In case of an unforeseen loss the policy holder can file a claim with supporting documents so that the insurer will pay the claim benefit.

Premium Rating

The premium rating is based the following parameters:

􀂾 Sales Turnover

􀂾 Industry

􀂾 Terms of Sales & Credit Control system in place

􀂾 Buyers Profile

􀂾 Buyers Destination

􀂾 Debtors Profile

􀂾 Past Receivables Provisions / Write offs

Advantages of Credit insurance

·         Enables development of new markets & new clients with the protection provided

·         Facility of expert advice on buyer’s credit worthiness

·          Confidence to offer more competitive credit terms to new customers in new markets

·          Help protect against potential restatement of earnings

·         Optimize bank financing by insuring trade receivables

·         Supplements overall credit risk management process

·         Helps in better business planning by eliminating unknown risks

·         Facilitates better risk management through the early warning system aided by the insurance company

Revised IRDAI guidelines on trade credit insurance

To keep pace with the changes in the economy, the IRDAI revised the 2010 guidelines on this policy three years back. The changes include:

1.      The credit risk of any buyer who is contributing over 2% of the total turnover of the policyholders should be compulsorily assessed

2.      A trade credit insurance policy should not be issued to lenders, financiers, banks, etc.

3.      The policy can only be issued to a seller on the whole credit turnover basis that will cover all the buyers.

4.      If the seller wants a credit policy for a particular segment /product or country, the coverage is offered provided it is bought for the whole credit turnover of all the buyers for the particular segment/product or country.

5.      The coverage under the trade credit insurance will be offered only to pre-agreed buyers as per the specified limits. Any change in the limits will be affective only after pre-approval from the insurer.

6.      The credit policy should not grant an indemnity of more than 85 per cent of the trade receivables from each buyer. This was earlier fixed at 80 per cent.

7.      A policyholder should be obliged under the policy to notify adverse information about the buyer to the insurer, said the guidelines which supersede the 2010 norms. 
 

8.      The policy holder should also notify the insurer on conflicting information about the buyer.

To know more about Credit Insurance please visit www.zeninsure.com  or send your queries to enquiries@zeninsure.com or you can call us at +91 9848884363. We would be glad to help you out.