What is Credit Insurance?
Trade credit insurance, Trade Business Insurance is an insurance policy and a risk management product offered by private insurance companies to business entities wishing to protect their accounts receivable from loss due to bad debt such as late payments or bankruptcy.
Insurance plays a major role in facilitating trade and is offered by vendors to their customers as an alternative to prepayment or cash on delivery terms, providing time for the customer to generate income from sales to pay for the product or service. Trade credit insurance is a trade finance tool.
Trade insurance is purchased by business entities to insure their accounts receivable from loss due to the insolvency of the debtors. The product is not available to individuals.
Trade credit insurance usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid as a result of protracted default, insolvency or bankruptcy.
Policy holders must apply a credit limit on each of their buyers for the sales to that buyer to be insured. The premium rate reflects the average credit risk of the insured portfolio of buyers.
Unpaid invoices can represent up to 40 percent of a company’s assets and are vulnerable to loss if your customers fail to pay. Many unpaid invoices are caused by insufficient knowledge about your customers’ solvency, and we believe that proper accounts receivable management could reduce risk and uncertainty.
At the most basic level, credit risk insurance is designed to protect you from unexpected losses due to the insolvency or past due default on the part of your insured customers. The limited number of underwriters who specialize in this unique coverage will in most cases, conduct credit evaluations on the accounts you wish to insure and approve them for specific credit limits based on your requests and the results of their research.
In Summary, credit insurance is a major tool on helping many companies grow their business where it opens up new customers and markets.