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What is Credit Insurance?
Credit Insurance protects your accounts receivable against non-payment. In other words, Credit Insurance pays you when your customer (debtor) does not, simple as that!
Who Uses Credit Insurance?
If your business sells to other businesses on open account, you should consider using credit insurance. All open account sales involve risk. The more customers you have on open account the greater the risk.
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What are the Benefits of Credit Insurance?
It is commonly used to increase sales, increase borrowing availability and catastrophic loss prevention, and more importantly, ensure protection against non-payment. Credit Insurance affords political risk (the inability to convert currency in a foreign country) coverage on export receivables. Credit Insurance allows your company to increase sales by expanding credit lines to existing clients, and offering credit to new clients. It can also assist in accounts receivable financing and a lender can be named as beneficiary under the contract.
The tables below illustrate the benefits of Credit Insurance
Catastrophic Loss Protection
Without Insurance
- Hire an attorney or collection agency
- The business faces a higher risk of loss and increased risk of bankrupcy
- Lengthy time in court
- Many receive pennies on the dollar
With Insurance
- Insurance company handles
- The risk of loss decreases
- Insurance company handles
- Insurance company handles
Increase Borrowing Potential
Without Insurance
- 70-80% Advance Rate on domestic Sales
- 0% Advance Rate Advance Rate on exports
- Banks will not lend more money due to the higher risk of loss
With Insurance
- Up to 90% Advance Rate on domestic sales
- Up to 90% Advance Rate on export sales
- Banks will lend more money because of the protection
Increase Sales Growth
Without Insurance
- Miss sales quotas
- Reduced market - Reduced sales
With Insurance
- Make sales quotas
- Expanded market - Expanded sales
Common Misconceptions
Misconceptions
- Insurance companies only take strong debtors
- Insurance companies do not cover disputes
- Debtor must be insolvent
- Costs more to use a broker than buying direct from the insurance company
Reality
- You can insure some or all of your debtors
- If a dispute occurs, the Credit Insurance carrier provides a path to resolve the dispute
- Policies pay in the event of insolvency, slow pay and political risk
- Admitted carriers file their rates with the state insurance commisioner. Premium is the same
What Does It Cost?
Accounts receivable insurance carriers have many different ways to compute premium rates such as sales (coverage, A/R, flat rate, and limit of liability base pricing methodologies, just to name a few). Please know all carriers look for a reasonable spread of risk. If you have one troubled debtor and trying to lay off that one risk, this product is probably not for you.
The two most common methods of computing premium rates are annual insured sales based pricing and coverage based pricing:
Annual insured sales based
Many factors go into determining the net annualized premium rate: policy face, industry risk, debtor pool average financial stress score, deductible, co-insurance, and policy features.
Coverage Based
The same factors as annual insured sales based affect the pricing of coverage based. Below is an example of how coverage based pricing works. It is an illustration only.
Annual Insured Sales Based Example
Generally speaking, the premium is calculated at a rate between $.10 – $.20 cents per $100 of domestic insured sales. This is typically for terms of sale up to 60 to 90 days. Terms of sale n7, n14, n21 up to n30, have lower rates. Export insured sales are calculated at rate between $.20 – $.30 cents per $100 of insured sales. Of course, concentrations in either high-risk countries or high-risk debtors can cause these rates to change.
When domestic and export sales are combined, there can be a blended rate or there can be a specified domestic rate and a specified export rate.
Below is an example of how annual insured sales based pricing works. It is an illustration only. Larger companies with more insured sales/coverage can expect to pay lower rates.
Example:
- $50 million domestic sales
- x $.10 (per $100 of sales)
- $50,000 premium
Coverage Based Example
The same factors as annual insured sales based affect the pricing of coverage based.
Below is an example of how coverage based pricing works. It is an illustration only.
Example:
- $5,000,000 of coverage
- x $10/000 of coverage
- = $50,000 premium
Each of these methods have their own strengths and weaknesses.
There is no perfect way to price credit insurance. As a general rule of thumb, if you are regularly making changes and need coverage decisions from the carrier, annual insured sales based pricing is often a good solution.
If you have stable clients and coverage needs (not frequently adding, removing, increasing, decreasing) coverage based pricing may be a better fit for your company.
Contact a Professional
Want to speak to a professional about your Credit Insurance needs?
Working with a specialist can help you determine the best custom solution for your unique needs
Latest Articles
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Frequently asked questions
A. No. Credit life or credit disability insurance is obtained by individuals to help pay debts in case of loss of income. Business credit insurance (also known as trade credit insurance, export credit insurance, or just credit insurance) is used to reduce the risk of non-payment in B2B transactions and is obtained by the company offering the goods or services, rather than the company receiving the goods or services.
A. There is no additional fee to use a broker. By law, you will pay the same rates for the coverage you choose whether you use a broker or work directly with the insurance company. However, a broker helps you evaluate quotes and implement your new policy. Brokers can also help with mandatory reporting requirements and may help you review future claims submissions.
A. The short answer is yes — because things can change. Business insolvency is predicted to increase due to global events. Evaluating the risk of non-payment requires considerable data collection and analysis. Your broker can help you figure out the right amount of coverage for your situation.
A. Trade credit can help you grow your business. When a business is able to purchase goods or services with trade credit, it frees up cash flow, making it a source of short-term financing. This practice allows the business to potentially expand its market or customer base without the negative impact of running out of cash, potentially putting them out of business. Many trade credit agreements incentivize paying early with a discount, so the business is able to decide whether to pay early at a cheaper price or to take longer to pay at full price — based on both money coming into the business and other expenses that need to be paid.
