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Saturday, April 19, 2014

Trade Credit Insurance

Credit insurance covers non-payment of enforceable domestic and foreign accounts receivable obligations.  It may also cover pre-shipment credit exposure. 

Cover is available for sales made on open account, letter of credit, sight/time draft, and cash against documents terms.  Repayment tenors of up to 180 days can be insured for the sale of non-capital goods and 5 to 7 years for the sale or lease of capital goods or for project finance. 

Companies use credit insurance to:

  • Increase market share through the extension of open terms
  • Facilitate accounts receivable or payable finance
  • Facilitate direct bank financing to end-customers
  • Mitigate risk and protect the balance sheet
  • Obtain third-party feedback on obligor, industry, and country risks
  • Increase leverage on obligors in default
  • Increase confidence among investors, analysts, and banks
 

Financial institutions also utilize credit insurance.  These policies cover purchased or factored receivables or notes, letter of credit confirmations, and structured accounts payable or vendor finance facilities.  

Obligors are underwritten for insured credit limits either by the insurer or under the insured’s discretionary credit authority.  Some insurers write limits on a non-cancelable basis while others reserve the right to cancel or reduce coverage at any time.   Because insurance is intended to cover unexpected loss, distressed obligors are usually excluded.  Certain other risks are also excluded, notably disputed payment obligations and nuclear-related perils.

Structurally, credit insurance requires the insured to retain some portion of the risk through co-insurance and/or deductibles.  Generally, higher risk retention yields lower premiums and increases the incentive for underwriters to cover marginal credits. 


Copyright 2013 by International Risk Consultants

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