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 buy 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 deductible. Generally, higher risk retention yields lower premiums and increases the incentive for underwriters to cover marginal credits. Some insurers write single-debtor policies, but most insurers prefer to write portfolio (multi-debtor) coverage where the enhanced spread of risk can help the insured reduce premium and obtain protection on marginal credits. Other policy structure concepts include:

Select-Risk Cover: A multi-debtor structure that excludes lower-risk obligors from the insurance policy. Generally, prospective insured’s can expect many underwriters to decline to quote on a select-risk portfolio or to receive higher premium rates or risk retention in cases where quotes are provided. However, insurers sometimes quote aggressively on select-risk portfolios if the remaining spread of risk is attractive.

Whole-turnover cover: A multi-debtor credit insurance structure that covers all of a company’s open account sales. Many insurers will decline to quote select-risk portfolios over concerns with adverse selection. For whole-turnover export policies, most insurers are amenable to treating Canadian sales as “domestic” and therefore to excluding them at the insured’s request. However, adding Canadian sales to an export program can help to make the portfolio more attractive to underwriters and improve the policy’s premium rate factor. Because whole-turnover programs maximize the spread of risk and generate higher premiums for insurers, clients may expect to receive more of the insurer’s capacity on higher risk credits than might otherwise be provided on a select-risk portfolio.

Key Account Cover: A multi-debtor structure that insures only the “largest” customers, e.g., customers with credit exposures above $500,000, the top ten customers, etc.

Catastrophic Cover: A multi-debtor structure with a sizeable deductible (either per-loss or first loss annual aggregate deductible) written into the policy. These structures would only result in indemnification in years where significant accounts receivable losses occur. Insured companies receive the benefit of significantly reduced premiums and approval of marginal credits because they retain high levels of risk.

First-Loss (Ground-Up) Cover: A multi-debtor insurance structure traditionally offered by Coface, Atradius, and Euler Hermes. These insurers have substantial underwriter staffs and large databases of information on obligors around the world. As such, they have the ability to underwrite all or the majority of the customer credit limits needed by the insured. Because they have more control over which obligors are covered, these insurers may provide coverage with no (or low) deductibles.

Excess-of-Loss Cover: A multi-debtor insurance structure traditionally offered by FCIA, Ex-Im Bank, Chartis, Houston Casualty, QBE, Ace, and Lloyds’ of London syndicates. If comfortable with the prospective insured’s credit management and credit procedures, these insurers will provide a high level of discretionary credit authority that allows the insured to underwrite the majority of the customers for coverage based on its own internal due diligence. Insurers typically reserve the right to underwrite the largest customer credit limits or those customers located in the most volatile markets. Larger annual aggregate deductibles are written to excess-of-loss policies to justify the significant discretionary credit authority granted.

Multi-Insurer Syndication: Insurers are increasingly willing to participating in syndicated credit insurance structures in cases where exceptionally large obligor exposures are to be covered. Most insurers require that their individual premiums be $100,000 or more to consider syndication. These structures have many benefits, including the diversification of insurer counter-party risk and the access to capacity necessary to establish large insured lines of credit for obligors. IRC has developed its own “Alliance” policy text for syndications that has now been accepted and utilized by all the insurers in the market. Syndications can be issued on both single and multi-debtor bases.

Global Programs: The traditional market view of a global credit insurance program is one in which a multinational company packages its global business and negotiates coverage with one carrier. Companies that take this approach hope to receive high-volume premium discounts and special treatment as a large premium account. However, individual business units often find that these globally tailored programs do not meet their local needs and that coverage can sometimes be improved in local markets. Further, concentrating coverage with one insurer at excessively low premiums can lead to coverage short-falls and other problems that multinationals should consider carefully.

In response to the inadequacy of this traditional approach, IRC develops global programs with corporate management, in close coordination with individual business units, to place highly durable, locally and globally optimized credit insurance coverage. We typically rely on capacity from multiple insurers to achieve this goal on a global scale. While IRC’s aim is to place coverage at reasonable premium levels, our foremost concern is maximizing coverage for our clients and building the foundation for strong and mutually beneficial relationships with insurers that will withstand market downturns and significant claims activity.

Captive Insurance: Captive insurance companies sometimes use trade credit insurers to reinsure the policies they issue to affiliated businesses. The credit insurer may issue coverage directly to the business unit, execute a reinsurance agreement with the captive, and then cede a portion of the risk and premium back to the captive. This structure is attractive if the credit insurer is licensed to write coverage in a state or country where the captive is not. Alternatively, the captive may issue coverage to the business unit and then buy credit insurance to cover the captive’s exposure above an attachment point. In both cases, the insurance can be structured in excess layers to help reduce premium costs and the captive can get the benefit of the credit insurer’s policy text and services, such as credit limit underwriting and claims processing.