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Commercial
Risk Credit Insurance
Business
credit insurance is a tool that substantially reduces the overall risk
of exposure to non-payment and the accompanying bad debt loss. Commercial
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.
The downside
of purchasing credit risk insurance
The buyer/client
will not be able to insure every account it wants or needs coverage for
Disputes must be resolved before an insolvent account will be paid by
the insurance carrier. For example, a disputed balance must be found to
be a legally sustainable debt for the amount to be covered under the terms
of a credit insurance policy.
Source:
"Credit and Collection Manager's Manual" edited by Michael Dennis
and Steven Kozack.
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