Glossary

Accounts Receivable: Money owed to a business by its customers for goods or services provided on credit. It represents outstanding invoices or debts due to the company within a certain period, typically 30 to 90 days. It is considered an asset on the balance sheet.

Accounts Receivable Insurance: A type of trade credit insurance that protects businesses against the risk of non-payment by customers. It covers losses resulting from customer insolvency, bankruptcy, or other financial defaults.

Aggregate Limit: The maximum amount an insurer will pay for all claims during a specified period, usually the policy term. Once the limit is reached, the policyholder must cover additional losses.

Assignment of Benefits: A legal transfer of insurance benefits from the policyholder to another party, usually a creditor or third party, enabling them to directly receive claim payments.

Bad Debt: Debt that cannot be collected and is written off as a loss. Insurance can cover this type of loss, especially in trade credit scenarios where a customer defaults on payment.

Bankruptcy: A legal process where individuals or businesses unable to repay their debts seek relief from creditors. In liquidation, assets are sold to pay debts; in reorganization, a repayment plan is negotiated.

Binding Authority: The authority given to an insurance broker or agent to enter into contracts of insurance and issue policies on behalf of an insurer.

Broker: An intermediary who helps individuals or businesses obtain insurance by matching them with appropriate policies and carriers, often negotiating terms and premiums on behalf of the insured.

Buyer Risk: The risk that a buyer will fail to fulfill payment obligations. This risk can stem from insolvency, political instability, or protracted default, and is often mitigated by credit insurance.

Cancellation Clause: A provision in an insurance policy that allows either the insurer or policyholder to terminate coverage before the policy’s expiration, typically requiring advance notice and possibly triggering refund or penalty provisions.

Cash Flow: The movement of money into and out of a business, essential for maintaining operations. Positive cash flow ensures a company can meet its obligations and invest in growth.

Claim: A formal request made by the policyholder to the insurance company for compensation or coverage following a covered loss or event, such as non-payment by a debtor.

Claim Denial: The rejection of a policyholder’s request for coverage or compensation by the insurer, often due to exclusions, insufficient documentation, or non-compliance with policy terms.

Claim Reserve: Funds set aside by an insurance company to cover the anticipated cost of claims that have been filed but not yet settled, ensuring financial readiness to pay policyholders.

Collections: The process of pursuing payment of outstanding debts, often involving reminder notices, negotiations, and in some cases, legal action to recover unpaid balances.

Commercial Risk: The possibility of financial loss resulting from a variety of business-related factors, including customer defaults, market downturns, and operational disruptions.

Contract of Insurance: A legally binding agreement between the insurer and the policyholder that outlines the terms, conditions, and obligations of both parties regarding coverage and compensation.

Coverage: The extent of protection provided by credit insurance policy, detailing the specific risks, events, or losses that the insurer will compensate the policyholder for.

Credit Approval: The process by which a lender or insurer assesses the financial stability and creditworthiness of a business or individual before extending credit or insurance coverage.

Credit Insurance: A type of trade credit insurance that protects businesses against the risk of non-payment by customers. It covers losses resulting from customer insolvency, bankruptcy, or other financial defaults.

Credit Exposure: The total amount of money that a business risks losing due to customer defaults or non-payment. Credit insurance can help mitigate this risk.

Credit Insurance Policy: A contract that provides protection to businesses against losses resulting from unpaid debts, typically covering the risk of customer insolvency, protracted default, or bankruptcy.

Credit Limit: The maximum amount of credit a lender or insurer is willing to extend to a borrower or policyholder, based on their creditworthiness and risk profile.

Credit Report: A detailed record of a or business’s credit history, used by lenders, insurers, and other financial entities to assess creditworthiness and risk.

Credit Risk: The possibility that a customer will default on their financial obligations, potentially resulting in losses for lenders, creditors, or insurers.

Credit Terms: The conditions under which credit is extended to a buyer, including payment due dates, interest rates, and penalties for late payments, affecting cash flow and financial risk.

Creditworthiness: A borrower’s ability to repay a loan or meet payment obligations. Lenders and insurers assess creditworthiness by analyzing financial statements, credit history, and other relevant factors.

Currency Risk: The risk that changes in exchange rates will negatively affect a transaction or financial position, particularly in international trade, where businesses may face currency fluctuations.

Creditworthiness: An assessment of a customer’s ability to repay debt based on their financial history, income, and credit score, used to determine receivables insurance terms.

Debt Recovery: The process of collecting unpaid debts from customers or borrowers, often involving legal action or the use of debt collection agencies to recover the owed funds.

Debtor: An individual or business that owes money to another party, typically for goods or services received on credit. The debtor is responsible for repaying the creditor within agreed terms.

Debtor Insurance or Receivable Insurance: Coverage designed to protect creditors from the risk of non-payment by their debtors, often provided as part of trade credit insurance policies.

• see Credit Insurance

Declination: The decision by an insurer to deny coverage or reject a claim based on factors such as risk profile, incomplete information, or exclusions in the policy.

Declarations: The section of an insurance policy that outlines key information, including the policyholder’s name, coverage limits, and premium amounts, as well as any relevant endorsements.

Default Risk: The possibility that a customer will not fulfil their financial obligations, such as failing to make payments on time or defaulting entirely.

Delinquency: Failure to meet payment obligations on time, often leading to penalties, interest charges, or collections efforts. Delinquent accounts may be insured against non-payment risk.

Demand Guarantee: A guarantee that requires the guarantor to pay upon the first demand of the beneficiary, typically used in international trade to secure performance or payment obligations.

Dispute Resolution: A process used to resolve disagreements between parties, including negotiation, mediation, arbitration, or litigation. Insurance policies may outline specific dispute resolution mechanisms.

Documentation Risk: The risk of loss due to incorrect, incomplete, or fraudulent documentation, particularly in international trade, where improper documentation can lead to non-payment or contract disputes.

Earned Premium: The portion of a premium that an insurer has earned by providing coverage for a period. It represents the amount of the total premium that corresponds to the period the policy was in effect.

Endorsement: A written amendment or addition to an insurance policy that alters the coverage, terms, or conditions. Endorsements can be used to add, modify, or restrict coverage.

Exclusions: Specific events, risks, or situations that are not covered under an insurance policy, often listed in the policy documents to clarify the limits of coverage.

Export Credit Insurance: A type of insurance that protects exporters from non-payment by foreign buyers due to commercial or political risks, ensuring payment for goods and services sold abroad.

Factoring: A financial arrangement where a business sells its accounts receivable to a factor at a discount in exchange for immediate cash, improving liquidity and reducing credit risk.

Financial Ratios: Metrics used to evaluate a company’s financial health and performance, such as debt-to-equity, liquidity, and profitability ratios. These ratios help assess creditworthiness.

Fixed Costs: Business expenses that remain constant regardless of production or sales levels, such as rent, salaries, and insurance premiums. Managing fixed costs is crucial for maintaining profitability.

Forfeiting: A financing method where an exporter sells its receivables from international trade to a forfeiter at a discount in exchange for immediate cash, transferring the risk of non-payment.

Financial Statements: Formal records of a company’s financial activities, including the balance sheet, income statement, and cash flow statement, used to assess creditworthiness and risk. They may or may not be audited by an accounting firm.

Financial Strength Rating: A rating assigned to a credit insurer by independent agencies, indicating its financial stability and ability to meet its obligations to policyholders.

Fraud Detection: The process of identifying fraudulent activities or claims in the insurance process, often involving data analysis and investigation to prevent losses from false claims.

Global Trade Insurance: Insurance coverage designed to protect businesses engaged in international trade from risks such as non-payment and political instability.

Grace Period: A specified period after the premium due date during which the policyholder can make a payment without losing coverage, typically ranging from 15 to 30 days.

Grace Period Extension: An additional period beyond the original grace period during which a policyholder can make overdue payments without losing coverage, provided certain conditions are met.

Gross Premium: The total amount paid by a policyholder for an insurance policy, before any deductions or expenses are subtracted, such as commissions or claims.

Indemnity: A legal principle where one party agrees to compensate another for loss, damage, or liability. In insurance, the policyholder is indemnified for covered losses according to the terms of the policy.

Insurable Interest: A requirement for insurance coverage, meaning the policyholder must have a financial stake in the subject of the insurance, such as property or accounts receivable, to prevent speculation.

Insured Party: The individual or business entity covered by an insurance policy. In trade credit insurance, this is typically the business seeking protection from non-payment by customers.

Insured Event: A specific occurrence or situation that triggers the insurance coverage, such as non-payment, bankruptcy, or damage. Insurers define insured events in the policy, and compensation is provided if such an event occurs.

Insurance Broker: An intermediary who helps clients assess risks and find the best insurance policies to meet their needs. Brokers provide advice, negotiate terms, and assist with claims management.

Insurance Certificate: A document that serves as proof of insurance, summarizing the coverage details, policy limits, and insured events. It is often required by third parties to verify the existence of coverage.

Insurance Policy: A legal contract between the insurer and the insured that outlines the terms of coverage, including risks covered, exclusions, premiums, and limits. The policy is the foundational document of the insurance agreement.

Invoice Discounting: A financing method where a business uses its accounts receivable to secure a loan, receiving a portion of the invoice value upfront while waiting for the customer to pay.

Insolvency: A financial condition where a business is unable to meet its debt obligations as they come due, potentially leading to bankruptcy or liquidation.

Invoice Factoring: A financial transaction where a business sells its accounts receivable to a third party (a factor) at a discount in exchange for immediate cash flow.

Lapse in Coverage: A situation where an insurance policy is no longer in effect due to non-payment of premiums or failure to meet policy terms, leaving the insured unprotected against potential losses.

Loss Notification: The process by which a policyholder informs their insurer of a potential claim or loss, starting the process of investigation and resolution by the insurer.

Loss Payee: The individual or entity entitled to receive insurance compensation for a covered loss, typically the policyholder or a designated third party, such as a creditor.

Loss Ratio: A measure used by insurers to compare claims paid to premiums received. A high loss ratio may indicate that claims exceed premium income, affecting profitability, and the ability to obtain ongoing insurance.

Letter of Credit: A financial instrument issued by a bank guaranteeing a buyer’s payment to a seller, used in international trade to reduce payment risk. The bank pays the seller if the buyer fails to do so.

Liability: A legal obligation to compensate for damage, injury, or loss. Liability insurance protects businesses and individuals from financial losses resulting from legal claims made by third parties.

Moral Hazard: A situation where the existence of insurance may lead to riskier behavior by the insured, knowing that losses will be covered. Insurers manage moral hazard through deductibles, exclusions, and claims processes.

Minimum Premium: The lowest amount an insurer will charge for a policy, regardless of the size or nature of the coverage. This ensures the insurer covers its administrative costs.

Non-payment Risk: The risk that a buyer or borrower will fail to meet payment obligations. Businesses mitigate non-payment risk through credit insurance, factoring, or other risk management tools.

Notice of Loss: A formal notification from the policyholder to the insurer that a loss has occurred, typically required to initiate the claims process.

Obligee: The party to whom a financial obligation is owed, typically a any insurer, or creditor, who is entitled to receive payments or services under a contract.

Obligor: The party responsible for fulfilling a financial obligation, such as making payments under a contract or insurance policy.

Open Account Terms: A payment arrangement where goods or services are delivered before payment is due, typically within 30-90 days. Credit insurance can help protect against non-payment on open account terms.

Payment Default: The failure of a buyer to make required payments on time. Payment default may result in penalties, legal action, or claims under credit insurance policies.

Payment Guarantee: A financial guarantee that ensures the seller will receive payment from the buyer or a third party, often used in international trade or large transactions to mitigate non-payment risk.

Payee: The individual or business entitled to receive payment from another party, often as part of a financial transaction or insurance settlement.

Payment Terms: The agreed-upon conditions under which a buyer must pay a seller for goods or services, including the time frame, payment method, and any discounts or penalties for late payment.

Peril: A specific event or risk that can cause loss or damage, such as fire, theft, or insolvency, covered by an insurance policy.

Policyholder: The individual or entity that owns an insurance policy and is entitled to coverage and benefits under its terms. The policyholder pays premiums to maintain coverage.

• see Insured Party

Policy Lapse: The termination of an insurance policy due to non-payment of premiums or other reasons, leaving the insured without coverage.

Policy Terms: The conditions and provisions set forth in an insurance policy that define the rights, obligations, and responsibilities of both the insurer and the policyholder.

Political Risk: The risk that a foreign government will take actions, such as expropriation, currency restrictions, or political instability, that negatively affect a company’s ability to collect payments or continue operations.

Premium: The amount paid by the insured to the insurer for coverage under an insurance policy. Premiums are usually paid monthly, quarterly, or annually, depending on the terms of the policy.

Protracted Default: A situation where a buyer fails to pay an invoice after an extended period, usually 180 days or more. Protracted default is often covered under credit insurance policies.

Receivables Management: The process of managing a company’s outstanding invoices and ensuring timely payment from customers. Effective receivables management improves cash flow and reduces trade credit insurance risk.

Recourse: The legal right to demand compensation or restitution from another party, often used in the context of credit or insurance claims.

Reinsurance: The process by which an insurance company transfers part of its risk to another insurer, allowing the original insurer to reduce exposure to large losses and improve financial stability.

Reinstatement: The restoration of an insurance policy after it has lapsed due to non-payment or another reason. The policyholder may need to meet certain conditions, such as paying past premiums.

Revenue Protection: Insurance coverage designed to safeguard a business’s income by compensating for losses due to a customer default.

Risk Appetite: The level of risk that a company or insurer is willing to accept in pursuit of its goals, influencing decisions on coverage, investment, and policy terms.

Risk Assessment: The process of evaluating the financial stability and creditworthiness of a potential policyholder or customer to determine the likelihood of non-payment or financial loss.

Risk Mitigation: Strategies used by businesses or insurers to reduce the likelihood of a loss or to lessen the impact of risks, such as diversifying customer bases or purchasing accounts receivable insurance.

Risk Transfer: The process of shifting the financial burden of a potential loss to another party, typically through insurance, to reduce exposure to risk.

Securitization: The process of pooling various financial assets, such as accounts receivable, and selling them as securities to investors. This allows businesses to convert receivables into immediate cash.

Surety Bond: A contract that guarantees one party’s obligations to another, typically involving a third-party surety (often an insurer) that agrees to pay if the obligations are not fulfilled.

Secured Debt: Debt backed by collateral, such as property or equipment, which the lender can seize if the borrower defaults. Secured debt reduces the lender’s risk and often comes with lower interest rates.

Subrogation: The insurer’s legal right to pursue reimbursement from a third party responsible for causing a loss after paying a claim to the policyholder. Subrogation allows insurers to recover some of their losses.

Trade Credit: A form of short-term financing where a seller allows a buyer to purchase goods or services on credit, with payment due at a later date, usually within 30-90 days.

Trade Receivables: Amounts owed to a business by its customers for goods or services sold on credit. Trade receivables are recorded as assets on the balance sheet and are critical to cash flow.

Trade Credit Insurance: Insurance that protects sellers from the risk of non-payment by buyers. It ensures that businesses are compensated if their customers fail to pay for goods or services, supporting cash flow stability.

Trade Credit Payment Guarantee: An assurance provided by a third party, typically an insurer, that a payment will be made to the seller if the buyer defaults, mitigating the seller’s financial risk.

Trade Credit Political Risk Insurance: A type of insurance that protects businesses from losses resulting from political events, such as war, civil unrest, or government actions that affect trade payments.

Trade Receivables: Amounts owed to a company by its customers for goods or services provided on credit, typically recorded on the balance sheet as an asset.

• see Accounts Receivable

Underwriting: The process by which insurers assess risks and determine the terms, premiums, and conditions under which they will offer insurance coverage to a policyholder.

Unearned Premium: The portion of the premium paid by the policyholder for coverage that has not yet been provided. If a policy is cancelled, the insurer may return the unearned premium to the policyholder.

Waiver of Subrogation: A clause in an insurance policy where the insurer agrees to waive its right to pursue reimbursement from a third party, typically used in contracts to reduce litigation between parties.

Working Capital: The difference between a company’s current assets and current liabilities, representing the funds available to meet short-term obligations and maintain operations.

Write-Off: The process of removing an uncollectible receivable or bad debt from the books, recognizing it as a loss. Write-offs are a common accounting practice to reflect actual financial performance.