Credit Insurance; Trade Credit Insurance; Credit Risk Insurance; International Credit Insurance

Trade credit insurance (aka Accounts Receivable Insurance) is a tool that reduces the overall risk of exposure to non-payment and the accompanying bad debt loss. Credit risk coverage can be written to include all customers, or it may be targeted to cover only certain buyers. Domestic credit insurance policies typically only cover "commercial risks." Commercial risks can be thought of as events generally within the control of buyers including:

• Insolvency or bankruptcy,
• Inability to pay for financial reasons,
• Protracted default: failure or refusal to pay for goods received, 
• Contract cancellation by the buyer, and
• Repudiation of the shipment when the buyer fails or refuses to take delivery of goods, 
• Pre-credit risk; which is the risk related to losses caused by a buyer's insolvency during the manufacturing period and before delivery of goods or completion of contract. 

Characteristics of a commercial risk credit insurance policy typically include:

• A specific credit limit established for each of the buyer's customers by the insurer based on the buyer's customer's financial strength and payment habits,
• Discretionary credit limits. An insurer may authorize the insured's credit department to set credit limits for certain customers,
• Annual deductibles,
• Per loss deductibles. 

The cost of credit insurance varies based on a number of factors including:

• The buyer's [the client's] historical loss experience,
• The perceived risk in the portfolio,
• The types of coverage being requested and the "spread" of risk being offered to the insurer,
• Risk sharing by the buyer including annual deductibles, specific account exclusions, per loss deductibles, the annual dollar cap on total paid losses, and a low dollar loss exclusions. 

© 2007 by Michael C. Dennis.  All Rights Reserved. Mr. Dennis is a consultant, and he can be reached by email at mcdennis13@yahoo.com