How does a Trade Credit Insurance Policy Work?

A Trade Credit Insurance Policy is an essential risk management tool for businesses that sell goods or services on credit. A Credit Insurance Policy provides protection against the risk of non-payment by the customers.

In a global economy, where trade involves transactions between multiple parties, a Trade Credit Insurance policy offers peace of mind and financial security. This blog will explore how does a Trade Credit Insurance Policy work?

What is Trade Credit Insurance?

Trade Credit Insurance, also known as Credit Insurance or Accounts Receivable Insurance, is a type of insurance policy that protects businesses from the risk of unpaid invoices by the customers for the goods or services. A Trade Credit Insurance Policy provides cover for losses that occur due to protracted payment delays, customer insolvency or political risks.

How does a Trade Credit Insurance Policy work?

Here is a breakdown of how a Trade Credit Insurance Policy exactly works:

1. Policy Initiation and Assessment: A Company seeking to insure its receivables purchases a Trade Credit Insurance Policy from a Trade Credit Insurance Provider. The Company will have to fill the proposal form and provide information about customers, overdue amounts and bad debts in the business.
2. Check Customer Health: The Trade Credit Insurer evaluates the creditworthiness of the company’s customers by studying the customer financials, public records, defaults etc. The Trade Credit Insurance Company then establishes credit limits for each buyer covered under the Policy. The credit limits define the maximum amount the insurer is willing to reimburse for each customer in case of a payment delay or default. The Credit Insurance Company will not reimburse any amount in excess of the limit and any loss above the limit has to be borne by the Insured himself.
3. Premium Calculation: Once the credit limits are established, the Trade Credit Insurance Company calculates the premium based on factors such as the creditworthiness of the customers, nature of the industry, past payment history, and the overall level of risk associated with the business and its customers. The Company purchases a Trade Credit Insurance Policy by paying the premium and coverage under the Policy commences.
4. Policy Coverage: The Trade Credit Insurance Policy covers a specified percentage of Invoice Value which will be reimbursed by the insurance company in case of losses due to delay or insolvency. Typically, coverage under the Credit Insurance Policy ranges from 85% to 90% of the Invoice Value.
5. Conduct Business: After purchasing the Credit Insurance Policy, the Policyholder can conduct business by extending credit to the buyers within the Credit Limits granted by the Insurance Company.
6. Monitoring and Reporting: After the Credit Insurance Policy is in place, the Insured is responsible for monitoring the creditworthiness and payment behaviour of its customers. Any change that may affect the creditworthiness of a customer like certain customers going overdue on their payments should be reported to the Trade Credit Insurance Company promptly. The Trade Credit Insurer may also direct the Insurer to cease shipment in come cases if the payment behaviour of the buyer is not appropriate and if the buyer is likely to default.
7. Adjustment of Credit Limits: The Insured may also request the Trade Credit Insurer for an enhancement in credit limit during the Policy Term for existing customers in case the business with that particular buyer has grown beyond expectations, necessitating an increase in credit limit. In case of a new buyer, the Insured can also ask for a Credit Limit by requesting the Insurance Company. The Trade Credit Insurance Company will evaluate the risk of granting credit limits based on the risk profile of the customers and may approve or decline the request.
8. Claim Submission and Settlement: In case of delay or non-payment by a customer, the Insured needs to intimate and lodge a Claim with the Trade Credit Insurance Company. The Insured will need to provide supporting documents, such as Invoice Copy, Proof of Delivery, and evidence of the customer’s default or insolvency. The Credit Insurance Company reviews the claim reimburses the Insured for the covered portion of the loss.

Benefits of Trade Credit Insurance

A Trade Credit Insurance Policy offers many benefits for businesses selling goods or services on credit such as:

1. Protection against Non-Payment: A Trade Credit Insurance Policy protects businesses against the risk of unpaid invoices by insuring the receivables. As a result, the Insured Business can control the amount of bad debts on their books which lock up capital and constrain cash flow and profitability. The Policy also allows businesses to expand their customer base by entering new markets and extending credit terms to new customers since the receivables are backed by a Credit Insurance Policy.
2. Improved Credit Management: A Trade Credit Insurance Company monitors the payment behaviour of the buyer and can provide an early warning signal about potential payment difficulties. This can enable the Insured Business to take timely steps to mitigate the risk, make informed decisions about extending credit to customers and set appropriate credit limits for the buyers.
3. Improved Access to Financing Opportunities: A Trade Credit Insurance Policy improves access to financing opportunities at competitive terms for businesses as banks are assured about the security of the cash flows. This is a big benefit of a Trade Credit Insurance Policy.
4. Coverage for Political Risks: Businesses engaged in exports are exposed to Political Risks as well apart from risk of delay or default by the buyer. In such cases, the buyer Is unable to make the payment to the seller despite having the wherewithal to do so because of political situations in wither country. A Trade Credit Insurance Policy also provides protection against Political Risks.

You can read our detailed blogpost on the benefits of a Trade Credit Insurance Policy.

Get Best Trade Credit Insurance Quotes with Qian!

A Trade Credit Insurance Policy is an important risk management tool that protects businesses from the risk of unpaid invoices.

Qian is an experienced Trade Credit Insurance Broker with experience of serving clients across different industries. If you wish to purchase a Trade Credit Insurance Policy, you can call us on 022-22044989 or email us at insurance@qian.co.in. We would be glad to assist you.

1. Trade Credit Insurance Policy – Coverage, Benefits and Exclusions
2. Forget all your worries about Bad Debts
3. Solution
4. You can protect yourself from Risk of Bad Debts by purchasing a Trade Credit Insurance Policy
5. What is a Trade Credit Insurance Policy?
6. What does a Trade Credit Insurance Policy Cover?
7. Protracted Default/Delayed Payment
8. Insolvency
9. Political Risks
10. What are the Benefits of a Trade Credit Insurance Policy?
11. Protection against Bad Debts:
12. Potential for Increased Sales:
13. Better Cash Flow:
14. How does a Trade Credit Insurance Policy work?
15. What is the Premium for a Trade Credit Insurance Policy?
16. What is the Sum Insured for a Trade Credit Insurance Policy?
17. What are the Exclusions under a Trade Credit Insurance Policy?
18. What is the Claims Process under a Trade Credit Insurance Policy?
19. Will my Premium be higher if I purchase a Trade Credit Insurance Policy through an Insurance Broker?
20. Interested in purchasing a Trade Credit Insurance Policy and securing the risk of Bad Debts?