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Trade Credit Insurance

 

                                  

 Trade credit insurance


Online shopping is the current and very convenient for the buyer and seller, however the seller is exposed to greater risk than the buyer, as most of the sales are purchased on credit. Realization of the credit is simpler in domestic transactions but it is not the same in business deals.

Credit Insurance, more popularly known as Trade Credit Insurance is insurance of default:

           What is credit insurance?

Ø  An effective financial risk management tool that provides the insured with protection against failure of its customer to pay their debts

Ø   Insurance of Receivables or unsecured sales

Ø  A Commercial Risk

Who can take this cover?

Credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their business particularly their overseas business.

Sellers: They can take the policy for the trade transactions with their approved buyers which is either for the delivery of goods or services

Approved buyer means a customer or any person who is liable to pay policy holder for trade credit         insurance transaction on open agreement and as approved by the insurer based upon credit worthiness of the buyer

An important aspect of credit insurance is that is available only on a business- to- business model. It is general misconception that credit insurance is available only against sale of physical goods. It is available even on services sales.

Who are not buyers?

Ø  Any State Government body or Para Government agencies

Ø  Buyers managed by the Sellers Directors, employees & its subsidiary

Ø  Single shipment

Ø  Banks, Financial Institutions, Lenders

           What is covered?

Loss suffered by the sellers due to non-payment of goods or services by the approved buyers due to:

Ø  Insolvency of the buyers

Ø  Presumed insolvency or protracted default

Ø  Political Risk (Applicable for Export Sales only)

 

Terminology:

Insured loss - It is the insured debt which is free from disputes and approved buyers having taken delivery of goods or accepted the provision of services

Insured debt - Amount owed under an invoice for the goods/services delivered to and accepted by the approved buyer. It may be including insurance, packaging charges, excise duty, sales tax and other similar charges included in invoice

 Credit limit - Limit Assessed by the seller applying principle of prudence and granted at a suitable level   depending on credit worthiness of each buyer which is maximum liability

 Discretionary limit - maximum limit the seller may grant to a buyer in absence of any specific credit limit

Premium depends on-

Ø  Turn over (Applicable on total turnover of a particular division of the organisation)

Ø  Number of approved buyers

Ø  Credit worthiness of the approved buyers

Ø  Geographical area/Territory

           Major benefits:

Ø  Balance sheet protection

Ø  Credit / Risk management

Ø  No or low bad debt provisioning

Ø  Cash flow relief

Ø  Alternative to Letter of Credit

Ø  Constant monitoring on buyer and his forward chain

Ø  Increase market share through expansion of sales in new market

Ø  Securing better borrowing terms

It is also a management tool in making risk decisions. Above all, management can focus on core business development (a great relief from time wasted on debt collection mechanisms and people cost)

Important exclusions:

Ø  Devaluation or depreciation of currencies

Ø  Sales to associate cos., government bodies, individual end customer

Ø  Sales done in excess of sanctioned Credit Limit

Ø  Disputes and non-acceptance

Ø  Sales done in countries with high risk profile

Ø  Trade disputes

Ø  Non-acceptance of goods

Disclaimer:   

Zen Insurance is an IRDAI registered broker which facilitates quick & accurate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products

 

 

 

 

 

 

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