Trade Credit Insurance Policy: Meaning, Coverages, How it Works, Exclusions, Benefits, Cost, Important Terms, Companies, Claims Process, Quotes

What is a Trade Credit Insurance Policy?

A Trade Credit Insurance Policy (also known as Accounts Receivable Insurance) is a type of Insurance Policy which provides coverage against the Risk that the Company’s Customer fails to pay for the Goods or Services that he has received. The Trade Credit Insurance Policy covers financial losses arising due to prolonged delays or customer insolvency.

The Policy is a risk management tool to protect yourself against the risk of Unpaid Invoices for Sales done on Credit Basis. All forms of Sales done on Credit Basis, that is, Export Sales and Domestic Sales can be secured with a Trade Credit Insurance Policy in India.

Consider a Case where an Indian Chemical Manufacturer supplies goods to its International Clients on Credit Basis. Trade Credit Insurance in India protects the Manufacturer against the Risk of Payment Delays or Non-Payment by the Buyers.

What does a Trade Credit Insurance Policy Cover?

A Trade Credit Insurance Policy protects the seller from the risk of non-payment by the seller for the goods or services he has received. A Trade Credit Insurance Policy covers losses due to the following:

1. Protracted Default: A Trade Credit Insurance Policy provides coverage if the payment is significantly delayed by the Buyer. This is known as Protracted Default and the Trade Credit Insurance Policy covers delayed payments beyond the pre-defined periods and compensates the Seller for the same.
2. Bankruptcy or Insolvency: A Trade Credit Insurance Policy provides compensation to the Insured if the customer becomes insolvent or declares bankruptcy. In such a case, the Trade Credit Insurance Company will reimburse the seller for his losses.
3. Political Risks: Sometimes a Buyer may not be able to make payment to the Seller on account of circumstances beyond his control. Consider a Case where a Seller supplies goods to the Buyer in an overseas jurisdiction, however the Buyer is unable to make the payment because of Local Regulations or Political Issues in his Country. Such issues of Non-Payment are covered under a Trade Credit Insurance Policy.

How does a Trade Credit Insurance Policy work?

A Trade Credit Insurance Policy allows the Insured Party to take informed decisions regarding extending credit to customers. The Credit Insurance Company monitors the performance of various buyers, sets credit limits and also provides early warning signals of potential payment difficulties. Here are the steps involved in arranging a Trade Credit Insurance Policy

1. Assess Customer Health and set Credit Limits: The Insured needs to submit information on buyers including customer financials, receivables outstanding and overdues etc. Based on the information, the Trade Credit Insurance Company sets credit limits for each customer . Credit Limit is the maximum amount that the Trade Credit Insurance Company will reimburse in case of a default and sales exceeding the Credit Limit to that particular buyer are not covered under the Policy. Additionally, the Policy also provides a Discretionary Credit Limit upto which the loss is covered to buyers whose credit limit is not approved.
2. Trade Credit Insurance Policy Quote and Terms & Conditions: Once the credit limits are set, the Credit Insurance Company will provide a quote for Trade Credit Insurance Policy along with the terms and conditions. The Insured can negotiate the Policy terms and conditions along with negotiating the quotes as well. Once the Policy terms and quotes are finalised, the Trade Credit Insurance Policy Coverage begins upon payment of premium.
3. Monitoring and Reporting: The seller has to submit a report of sales and outstanding receivables with each buyer at the end of every month. The Trade Credit Insurer monitors the performance of each buyer and warns of potential payment difficulties.
4. Claim: The seller sells goods on Credit to the Buyer. If the buyer delays payment or declares bankruptcy, the Trade Credit Insurance Company will reimburse 85% to 90% of Invoice Value based on submission of required documents.

What are the Exclusions under a Trade Credit Insurance Policy?

A Trade Credit Insurance Policy typically excludes the following:

1. Disputes: Payments not made on account of disputes between buyer and seller are not covered under a Credit Insurance Policy.
2. Sales to Subsidiary and Associates are not insured under a Trade Credit Insurance Policy
3. Sales made against advance payment and irrevocable confirmed letters of credit are not covered under a Trade Credit Insurance Policy
4. Sales made to Government Bodies are not covered under a Trade Credit Insurance Policy

What are the Benefits of a Trade Credit Insurance Policy?

A Credit Insurance Policy offers many benefits as follows:

1. Protection against Bad Debts: Accounts receivable constitutes a significant portion of the balance sheet. Unpaid Invoices adversely impact a business. A Trade Credit Insurance Policy protects a business from Risk of Bad Debts.
2. Facilitates Sales Growth: A Trade Credit Insurance Policy allows the seller to extend credit to new customers and expand into newer geographies without much information on the Buyer’s Credit History since any Payment Delay/Default is covered by the Insurance Company.
3. Improved Cash Flow: A Credit Insurance Policy makes payment even if the dues are outstanding for more than a certain number of days (Protracted Default). This keeps the Receivables Days Outstanding under check and leads to better Cash Flow for the Company.
4. Easier Access to Financing: When your Account Receivables are insured, it becomes easier to secure loans at competitive terms.

What is the Cost of a Trade Credit Insurance Policy?

The Cost for a Trade Credit Insurance Policy is calculated as a % of Insurable Turnover/Projected Credit Sales for the coming financial year. Usually, the Cost of a Trade Credit Insurance Policy is 0.15% to 0.20% of the Insurable Turnover. The Premium depends on the following factors

1. Sum Insured and Turnover of the Company
2. Industry in which the company operates
3. Prior Claims Experience
4. Credit Terms which the company offers to its customers
5. Risk Profile of the Customers including their payment behavior, history of defaults etc.

Important Terms under a Trade Credit Insurance Policy

Non-Qualifying Loss (NQL)

Non-Qualifying Loss refers to the minimum amount of Loss that the Insured must bear from his own pocket before the Trade Credit Insurer starts paying out the Claim. For example, if a policy has a NQL of Rs250,000, and the insured faces a loss of Rs200,000, the complete Rs200,00 loss would be borne by the Insured since the loss has not exceeded the NQL amount.

Claims Waiting Period

Claims Waiting Period is the time period for which a seller must wait after the Unpaid Invoice Due date after which the Claim becomes payable under the Policy.

Discretionary Credit Limit

A Trade Credit Insurance Policy allows the sellers to set limits for particular buyers without requiring specific approval from the Insurance Company. For example, if a TCI Policy has a Discretionary Credit Limit of Rs750,000, the seller can sell goods upto Rs750,000 to any buyer without the approval of the Trade Credit Insurer and receive coverage under the Credit Insurance Policy.

What is the Sum Insured for a Trade Credit Insurance Policy?

The Sum Insured for a Credit Insurance Policy is the Annual Credit Sales Turnover of the firm. The Sum Insured excludes all Sales done against Advance Payments and against Letters of Credit.

Which Insurance Companies offer a Trade Credit Insurance Policy?

Following Insurance Companies offer a Trade Credit Insurance Policy:

1. New India Assurance Company
2. HDFC Ergo General Insurance Company
3. ICICI Lombard General Insurance Company
4. Bajaj Allianz General Insurance Company
5. SBI General Insurance Company
6. Iffco Tokio General Insurance Company

What is the Claims Process under a Trade Credit Insurance Policy?

The Claims Process in a Trade Credit Insurance Policy is as follows:

1. Claim Intimation: The first step is to intimate the Claim to the Trade Credit Insurance Company in writing. The Insured Party (Seller) must provide details like Overdue Amount, Payment History, while registering a Claim.
2. Document Submission: The Insured needs to submit the documents required for a Trade Credit Insurance Claim such as ID Proofs, Claim Form, Invoice Copies, Purchase Orders, Proof of Loss etc.
3. Claim Investigation and Settlement: The Insurance Company assesses the Claim based on Documents submitted. If the Claim is admissible, the Insurance Company settles the Claim as per the Trade Insurance Policy Terms and Conditions

What are the documents required to file a Claim under a Trade Credit Insurance Policy?

The Trade Credit Insurer requires the following documents to process a Claim under a Trade Credit Insurance Policy

1. Duly signed & stamped Notification of Overdue Account form
2. Clear & legible Invoice copies
3. Statement of account
4. Proof of Delivery
5. Purchase Order
6. Sales Contract
7. Debit Note copy (If there are any)
8. Copy of Communication with the debtor following up for payment

Get Beat Trade Credit Insurance Policy Quotes with Qian!

In today’s uncertain economy, unpaid accounts receivables are a major risk faced by most businesses since most sales are done on credit basis where the seller extends credit to the buyer.

A Trade Credit Insurance Policy is an excellent risk management tool for securing Trade Receivables. Qian is a specialist Trade Credit Insurance Broker with experience of serving customers across industries for their Credit Insurance needs over the last 10 years. Qian has tie-ups with the top Insurance Companies to cater to the clients for their Trade Credit Insurance Requirements and can assist you with comprehensive coverage at competitive premiums. Our dedicated team offers 24/7 FREE Claims Assistance for all the Claims in the Credit Insurance Policy so that you never have to worry about Claims.

If you wish to purchase Trade Credit Insurance Policy for your company, you can reach out to the experts at Qian at insurance@qian.co.in or 📞 022-35134695 . We will be glad to assist you.

FAQS about Trade Credit Insurance Policy