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.