All You Want To Know About Credit Insurance
There are two main types of Credits for which a business seeks guarantee or insurance: 1. Domestic Trade Credit, and 2. Export Credit. Generally the term Credit Insurance refers to Domestic Trade Credit Insurance.
In a business, extending credit to a customer always involves a certain amount of risk. In case, for any reason, the customer defaults on payments, it can have serious consequences on the business of the supplier.
• It can seriously upset the cash flows of the supplier,
• It may necessitate rescheduling of production causing delays in deliveries to other customers, causing further problems;
• It can affect credit worthiness of the supplier with his upstream-suppliers in turn
Trade credit insurance covers businesses against risks of bad debts due to insolvency of the customers or undue delays in payments.
There are various types of trade credit insurance policies. The two basic types are:
• Whole turnover credit insurance policy covers the whole of the policy holder’s business and allows the policy holder to extend credits up to a certain limit agreed upon between the insurer and the policy holder initially. This gives the policy holder advantage of being able to take prompt decision regarding extending credit to new customers. Also within the agreed limit the policy holder is able to switch the credits between the customers to suit his business needs;
• Specific account credit insurance policy will cover one or more named customers applicable to single contract or on turnover basis.
In whole turnover credit insurance policy, the insurer’s assessment is based mainly on:
• Annual turnover of the policy holder’s business
• Previous experience of bad debt losses
• Efficient credit control systems
In case of the specific account credit insurance policy, the insurer’s assessment is based also on:
• Status of the buyer and the type of business he operates
• Buyer’s credit record
Generally a credit insurance policy holder has to accept certain obligations such as:
• The risk of bad debt is shared between the policy holder and the insurer, insurer bearing between 75% to 95% loss;
• The policy holder has to observe due prudence in extending credits to customers;
• The policy holder cannot agree to postpone due date for payment without insurer’s consent; the insurer may alter limits of credit for specific customers.
Premium is on case to case basis.