What is it?
Trade credit insurance provides protection against insolvency, bankruptcy and dishonesty (avoidance of payment) and consequently potential losses that a creditor may incur if a buyer of his goods or services fails to fulfill his obligation. This service is available to both domestic and export companies.
What is insured?
The object of insurance is the debtor’s debt to the creditor arising from the delivery of the goods or the provision of services. The credit insurers of the insurance policy guarantee that if the insured‘s buyer becomes insolvent, the obligation will still be fulfilled – the policyholder will receive an insurance benefit and therefore will not suffer any losses.
Main credit insurance principles:
- Credit insurance is firstly about the credit limit. The credit limit is the maximum coverage given to the particular buyer. The amount of the coverage is fixed by the Insurer. The insurance covers the receivables only of those buyers who have been approved with the credit limit.
- The two parties of the insurance contract, i.e. the Insurer and the Insured both share the risk of the buyer’s insolvency. Usually the Insurer covers 75-90 percent of the loss.
- The credit insurance does not cover the companies associated with the Insured or the state institutions, or newly established companies operating less than one year.
Why is it worth to insure?
Credit insurance prevents companies from bad debt risk. The main benefit of the credit insurance is that by keeping to the credit insurance contract terms and conditions, the company may avoid loss from the insolvency of one or several buyers. The credit insurance is an important credit risk management tool:
- the buyers risk is evaluated, and the maximum trade credit limit for each buyer is fixed;
- the risk of the insured buyers is monitored;
- the policyholders may regain their money before the claim payment (by debt collection).
Other advantages of the credit insurance are as follows:
- Online access to the insurance company’s database;
- Not wasting the time on assessment and evaluation of buyers;
- Buyers are assessed by the insurance company;
- Economy of the staff;
- Protection from negative adjustments of trade receivables in the balance sheet;
- Shorter DSO;
- Better conditions for financing the working capital (e.g. factoring).