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Determining Trade Credit Insurance Premiums and Deductibles
Credit insurance premiums that would be paid by creditors for credit insurance coverage are based on a number of factors including:
- The type of coverage requested;
- The amount of coverage required;
- The annual deductible negotiated;
- The co-payment negotiated, and
- The insurance carrier's evaluation of risk of loss in the accounts submitted for evaluation
Other important components of pricing relating to the premium on a credit insurance policy include:
- Industry loss history;
- Customer industry failure rates;
- Total sales to be insured;
- Terms of payment offered to customers;
- Previous bad debt write-offs by the company requesting credit insuance;
- Aging of receivables at the time the application for credit insurance is submitted; and
- The credit management systems, policies, processes and procedures.
Credit insurance premiums are normally calculated by the carrier by (a) factoring in the expected bad debt related losses (b) and conexpenses required to manage the policy andter factoring in a reasonable profit margin for the insurance companyhe credit insurance premium is normally set as a percentage of the shipped value of product. It is calculated on the aggregate expected turnover/sales. If under a $1,000,000 policy, turnover/ sales are anticipated at $2,500,000, then the annual premium would be calculated on the $2,500,000 turnover/sales amount. A reasonably priced policy might have a premium of 0.50% to 1% or $12,500 to $25,000.
Some policies require the insured to pay the premium up-front on the anticipated turnover/sales whereas others have you pay monthly or quarterly based on actual sales. These types of policies would require proof that the shipments were actually made. The form of proof is usually in the form of an account receivable (AR) report. This would be submitted monthly to insure that the shipments were in fact covered, and the insured would submit a premium payment for the amount of the shipments.
Edited by Michael C. Dennis