Trade credit insurance, also called accounts receivable insurance, is a financial tool that protects your company from your customer’s failure to pay their trade related debts. This situation can occur if your customer becomes insolvent or if they simply fail to pay within the agreed upon timeframe.
A credit insurance policy with Euler Hermes eliminates one major source of business uncertainty: the impact of unpaid invoices. This assurance empowers you to sell more and to sell with confidence.
How does credit insurance works?
A trade credit insurance policy with Euler Hermes is a dynamic partnership that protects your company against unforeseen bad debt risks. At the onset of the policy, Euler Hermes analyzes the creditworthiness of your insurable customers and assigns them a specific credit limit, which is the amount we will cover should that customer fail to pay.
Euler Hermes then proactively monitors your buyers throughout the duration of your policy in order to ensure your covered buyers’ continued creditworthiness. Your business will benefit from access to our global database with live information on millions of companies, representing 92% of global GDP.
Throughout the duration of the policy, you can easily request new credit limits or additional coverage on existing buyers when those needs arise. Euler Hermes investigates the risks of the new coverage request and will either approve it or preserve the existing coverage, giving a detailed explanation as to why.
By implementing credit insurance, your credit management team is strengthened by the thousands of Euler Hermes risk professionals across the globe; Euler Hermes essentially becomes an extension of your team.
The ultimate goal of a trade credit insurance policy is not just to simply pay claims as they arise, but to help policyholders avoid foreseeable losses. If an unforeseeable loss should occur, the indemnification aspect of the trade credit insurance policy comes into play.
Indemnification against loss is often believed to be the main benefit of a credit insurance policy, but there are a myriad of other benefits that can justify the cost of a trade credit insurance policy many times over – even if you never make a claim. When your receivables are insured, your company can:
Safely grow sales, domestically and abroad, to new and existing customers
Protect its business from risk of customer default and catastrophic loss
Reduce bad-debt reserves
Obtain greater access to funding and secure better finance options
Expand export markets and offer competitive terms overseas
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Trade credit insurance, business credit insurance, export credit insurance, or credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy. This insurance product is a type of property and casualty insurance, and should not be confused with such products as credit life or credit disability insurance, which individuals obtain to protect against the risk of loss of income needed to pay debts. Trade credit insurance can include a component of political risk insurance which is offered by the same insurers to insure the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation etc.
This points to the major role trade credit insurance plays in facilitating international trade. Trade credit 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. This requires the vendor to assume non-payment risk. In a local or domestic situation as well as in an export transaction, the risk increases when laws, customs communications and customer’s reputation are not fully understood. In addition to increased risk of non-payment, international trade presents the problem of the time between product shipment and its availability for sale. The account receivable is like a loan and represents capital invested, and often borrowed, by the vendor. But this is not a secure asset until it is paid. If the customer’s debt is credit insured the large, risky asset becomes more secure, like an insured building. This asset may then be viewed as collateral by lending institutions and a loan based upon it used to defray the expenses of the transaction and to produce more product. Trade credit insurance is, therefore, a trade finance tool.
Trade credit 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. The cost (premium) for this is usually charged monthly, and are calculated as a percentage of sales for that month or as a percentage of all outstanding receivables.
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. In addition, credit insurance can also cover single transactions or trade with only one buyer.
Trade credit insurance was born at the end of the nineteenth century, but it was mostly developed in Western Europe between the First and Second World Wars. Several companies were founded in many countries; some of them also managed the political risks of export on behalf of their state.
Following the privatisation of the short-term side of the UK’s Export Credits Guarantee Department in 1991, a concentration of the trade credit insurance market took place and three groups now account for over 85% of the global credit insurance market. These main players focused on Western Europe, but rapidly expanded towards Eastern Europe, Asia and the Americas:
Euler Hermes, merger of the two credit insurance companies of the Allianz Group. Euler Hermes is the world’s number one credit insurance provider.
Coface. Formerly a French government sponsored institution established in 1946, this company is now part of the Natixis group.
Atradius, a merger between NCM and Gerling Kreditversicherung. Later renamed Atradius after it was demerged from the Gerling insurance group.
FCIA. Originally a part of the Export-Import Bank of the United States, FCIA is now owned by The Great American Insurance Group.
Many variations of trade credit insurance have evolved ranging from coverage that can be canceled or reduced at an insurers discretion, to coverage that cannot be canceled or reduced by the insurer during the policy period. Other programs may allow the policy holder to act as the underwriter.
While trade credit insurance is often mostly known for protecting foreign or export accounts receivable, there has always been a large segment of the market that uses Trade Credit Insurance for domestic accounts receivable protection as well. Domestic trade credit insurance provides companies with the protection they need as their customer base consolidates creating larger receivables to fewer customers. This further creates a larger exposure and greater risk if a customer does not pay their accounts. The addition of new insurers in this area have increased the availability of domestic cover for companies.
Many businesses found that their insurers withdrew trade credit insurance during the late-2000s financial crisis, foreseeing large losses if they continued to underwrite sales to failing businesses. This led to accusations that the insurers were deepening and prolonging the recession, as businesses could not afford the risk of making sales without the insurance, and therefore contracted in size or had to close. Insurers countered these criticisms by claiming that they were not the cause of the crisis, but were responding to economic reality and ringing the alarm bells.
In 2009, the UK government set up a short-term £5 billion Trade Credit Top-up emergency fund. However, this was considered a failure, as the take-up was very low.
What is ‘Credit Insurance’
Credit insurance is a type of insurance policy purchased by a borrower that pays off one or more existing debts in the event of a death, disability, or in rare cases, unemployment. Credit insurance is marketed most often as a credit card feature, with the monthly cost charging a low percentage of the card’s unpaid balance.
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BREAKING DOWN ‘Credit Insurance’
Credit insurance can be a financial lifesaver in the event of certain catastrophes. However, many credit insurance policies are overpriced relative to their benefits, as well as loaded with fine print that can make it hard to collect. If you feel that credit insurance would bring you peace of mind, be sure to read the fine print and compare your quote against a standard term life insurance policy.
Three Types of Credit Insurance
There are three types of credit insurance, each paying its benefit in different ways:
Credit life insurance: This type of life insurance pays off loans if you die.
Credit disability insurance: Also called accident and health insurance, this type of credit insurance pays a monthly benefit directly to a lender equal to the loan’s minimum monthly payment if you become disabled. You must be disabled for a certain amount of time before a benefit is paid. In some situations, the benefit is retroactive to the first day of disability. In other cases, a benefit may begin only after a waiting period is satisfied. Common waiting periods are 14 days and 30 days.
Credit unemployment insurance: With this type of insurance, if you become involuntarily unemployed, this insurance pays a monthly benefit directly to the lender equal to a loan’s minimum monthly payment. You must remain unemployed for a certain number of days before a benefit is paid. In some cases, the benefit is retroactive to the first day of unemployment. In other cases, the benefit begins only after the waiting period is satisfied. The common waiting period is 30 days.
Questions to Consider Before Purchasing Credit Insurance
Do you have other insurance or assets that would cover debt obligations in the event of my death, disability or unemployment?
Would it be better to buy a life insurance policy or a disability insurance policy? Credit insurance may cost more than other more traditional insurance options.
If you purchase single premium coverage, will the premium be financed as part of the loan? If so, how much will the loan payment increase due to the cost of the credit insurance?
Will the credit insurance cover the full term of the loan and the entire balance?
How long is the waiting period for monthly benefit to be paid?
What isn’t covered by the policy?
Can the insurance company or lender cancel the insurance?
Can policy terms or premiums be changed without consent?