Trade Credit Insurance

Trade credit insurance is designed to protect companies against the risk of not being able to collect on the sale of goods or services. This can include nonpayment, late payment, customer bankruptcy, customer insolvency, or another event outside the control of the buyer or seller.

Companies purchase this coverage if late payments or customer bankruptcy can lead to issues with cash flow, profitability, or financial solvency. The organization can purchase this type of policy to transfer these risks to an insurance carrier and maintain peace of mind and financial stability.

Through trade credit coverage, insurers can help companies prevent foreseeable losses and can provide up-to-date reports outlining potential risks of specific customers based on their credit worthiness and country of origin. Companies in turn can benefit from strengthened credit worthiness themselves through the risk transfer process. There are three types of trade credit policies:

Whole Turnover Policy:

A whole turnover policy includes all buyers and insures against nonpayment. Typically, companies decide whether to insure all domestic sales, all international sales, or both.

Key Account Policy:

A key account policy is a type of trade credit coverage designed for businesses that want to insure specific key accounts. For this type of policy, there is coverage for a specific customer or set of customers, but not an entire book of business.

Single Buyer Policy:

A single buyer policy provides coverage for accounts receivable tied to one specific customer or buyer. This type of policy is typically reserved for businesses that have one large customer comprising a majority of their revenue.

Although standard trade credit policies exist, many policies in this area are tailored to fit specific needs of the policyholder. It is possible to seek coverage on a transaction-by-transaction basis depending on how complex the needs and contracts are.

As part of the underwriting, insurance carriers will analyze the financial stability of a company and its customers. The insurance carrier sets credit limits and policy limits which dictate how much will be paid out in the event of a claim. Coverage limits can change during the policy period based on changing information. For example, if negative information is discovered, limits can be reduced.

The cost of the policy varies by carrier, the type of policy, and the limits requested. The premium can vastly differ depending on if it is a single buyer policy or a whole turnover policy. The majority of policies are sold on a whole turnover basis and premiums are usually set based on a percentage of the turnover.

Have any questions or want to discuss trade credit coverage in more detail? Let’s chat!