Trade credit insurance

Trade credit insurance provides cover against the risk of businesses not being paid for goods or services that they sell, whilst also giving businesses access to detailed information and guidance on all aspects of trade from industry experts.

Hence, trade credit insurance provides the key to successful trade. It champions innovation whilst also maintaining the highest standards of performance that only many decades of supporting businesses around the globe can bring.

Trade credit insurance is suitable for all types of businesses, whether they are trading nationally or internationally, and for a variety of sectors from manufacturing to services. In terms of size, the benefits can apply to micro SMEs, right through to the largest multinationals.

While protection against non-payment is often perceived as the main reason to purchase trade credit insurance, there are also a number of other benefits to businesses taking out trade credit insurance including expanding sales, helping expansion into new international markets, obtaining better finance terms, gaining in-depth knowledge of the marketplace and reducing bad debt reserves.

What does trade credit insurance cover?

Trade credit insurance provides cover for businesses if customers who owe money for products or services do not pay their debts or pay them later than the payment terms dictate. It gives businesses the confidence to extend credit to new customers and improves access to funding, often at more competitive rates. Trade credit insurance is for products and services that are due within 12 months.

Trade credit insurers will generally cover two types of risk that a business will include in their cover:

Commercial risk

This is the risk that the policyholder’s customers are unable to pay the outstanding invoices because of financial reasons, for example, declared insolvency or protracted default.

Political risk

The risk of non-payment as a result of events outside the policyholder or their customer’s control, due to political events (wars, revolutions); disasters, (earthquakes, hurricanes); or economic difficulties (currency shortages meaning inability to transfer money owed from one country to another).

As part of the policy, the trade credit insurer will monitor the policyholder’s customers, assigning each of them a credit limit, which is the amount the insurer will protect the policyholder if that customer fails to pay. Monitoring of a policyholder’s customers can be done using a variety of sources, for example financial statement, information supplied by other policyholders that sell to the same customer, public records and visits to the policyholder’s customer.

As well as providing protection against non-payment, trade credit insurance gives the policyholder access to an extensive information network which acts as an effective early warning mechanism for adverse economic or customer trends. The relationship between the insurer and the policyholder does not remain static as the trade credit insurer will be there to support a company when trading.

Throughout the lifetime of the policy, the trade credit insurer will inform the policyholder of any changes that might impact the financial health of their customers and their ability to pay them for goods or services delivered. They will then establish a plan with the policyholder to mitigate the risk. The terms of cover may change over the lifetime of the policy to reflect the financial strength of any customer, and it is the responsibility of the insurer to proactively monitor its policyholder’s customers, to ensure their continued creditworthiness.

During the policy period, the policyholder may request additional coverage for trade with any of its customers. The trade credit insurer will then evaluate the risk of increasing cover and either approve or decline the additional credit limit request, with a clear and timely explanation. Policyholders can also request a credit limit for a new customer under an existing policy.

What does trade credit insurance not cover?

Currency devaluation

A deliberate downward adjustment to the value of a country’s currency relative to another currency, group of currencies or standard.

Bond defaults

Failure of the debt holder or buyer to settle their debts.

Any derivatives

A security (such as stocks and commodities) with a price that is dependent on fluctuations in the market.

Sanctioned countries

Countries where there are political trade restrictions put in place against target countries with the aim of maintaining or restoring international peace and security.

Non-enforceable debt

When the statute of limitation for debt collection has passed, a creditor is no longer allowed by law to keep chasing a debt that’s statute barred.

Bribery

Giving or receiving a financial or other advantage in connection with a function that is expected to be performed impartially, or improper performance of a position of trust or in good faith.