There are three primary underwriting philosophies in the credit insurance industry; the first two described below account for over 98% of the multi-buyers issued each year:
Ground-Up is traditionally underwritten with no (or a low) deductible and no (or little) discretionary authority. The insurance company underwrites each individual buyer of the insured company’s portfolio from the "ground up."
To establish a customer credit limit, the insured typically must only provide the name and address of the buyer. The insurance company will research the buyer independently, assess its creditworthiness, and render a credit limit decision. There are cases when the insurance company cannot obtain adequate information on the buyer and will look to the insured to provide additional information, i.e., financial statements.
Companies large and small utilize ground-up insurance. Those firms with less-developed credit departments, those lacking experience in foreign credit, and those with relatively few buyers may fit well with ground-up underwriting as it enhances the credit evaluation process.
Excess-of-Loss is protection structured with an annual aggregate policy deductible and typically with sizeable discretionary credit limits (DCLs), which allows the insured company to retain much of its credit authority.
Excess-of-loss insurers typically offer DCLs that are two to four times higher than the policy deductible. The level of discretionary authority offered by the insurer typically will be high enough to cover 85-98% of the buyers in the portfolio, with the insurance company only underwriting the largest or most difficult credit limits.
The procedures endorsed into the insurance policies for using the DCL are generally similar to the credit evaluation procedures found in most credit departments. Because of this, companies with strong credit departments may prefer excess-of-loss coverage, as it allows them to retain much of their credit controls and extend insured credit lines simply by following their established credit evaluation procedures.
Catastrophic coverage carries a sizeable first-loss deductible or a substantial percentage of co-insurance written into the policy. These structures indemnify against only the largest losses and offer the insured the lowest possible cost and maximum administrative ease.