What is Trade Credit Insurance?

You grant payment terms to your clients every day, and because it’s your routine business activity, you may not pay heed to the risks which you are taking. But what if one of your customer defaults? Or what if your customer’s business closes down?

Though you might not have experienced any of these situations till now; there is no guarantee that they will not arise in the future as well.

It is essential to safeguard your business against the risk of your customer’s insolvency, and here trade credit insurance can help you.

A trade credit insurance plays an essential role by insuring manufacturers, providers of services, or traders against the risk that their buyer doesn’t make payment or delays the payment due to bankruptcy or insolvency. Here, a trade credit insurance ensures that your company doesn’t get affected if one or more customers fail to make payment. It is a valuable tool to manage your risks, as seen in the following image.

Some of the risks covered under trade credit insurance policy are:

  • Commercial Risks: It covers both the delayed payment by debtors along with the insolvency.
  • Natural and Political Risks: It offers coverage against a wide range of risks like political unrest, floods, cyclone, protracted default on state-owned entities, etc.

In 2016, the Insurance Regulatory and Development Authority of India (IRDAI) issued new guidelines on trade credit insurance. According to these guidelines, it is necessary for every insurance company to carefully assess the credit risk of those buyers who constitute over 2% of the total turnover of the policyholder. Further, a trade credit insurance policy can’t be issued to banks, lenders and financers. Also, as per the new guidelines, a trade credit insurance policy can’t grant indemnity of over 85% of the trade receivables from each buyer.

How is Premium Computed?

While computing the premium for trade credit insurance, the insurer considers the estimated or projected credit sales for the financial year. Here, the insurance policy starts only after the policyholder applies for the credit limit on each buyer, i.e., debtor, which should be duly sanctioned by the insurance company. Here the credit limit is the maximum exposure, i.e., outstanding debt of the policyholder against that particular buyer at any point in time.

Read more: What is limits of insurance in Commercial Liability Insurance?

Though a trade credit insurance plays an imperative role in covering you against client’s insolvency or default; there are certain situations when the insurer can refuse to settle your claim. The following are the events when the insurer can reject your claim=

  • Any losses which are caused by or arise due to wrongful or dishonest act or omission of the policyholder or its agents
  • If there is a material breach or inaccuracy with regards to warranty or representations, which are made herein
  • If there is a nuclear reaction, nuclear radiation or radioactive contamination
  • If there is insolvency or financial default of the party other than buyer
  • If the policyholder or its agents fail to comply with all the important laws and regulations in connection with the insured goods
  • If sales are made in terms of cash on delivery, cash in advance, or unconfirmed irrevocable letter of credit

Conclusion

If you want to sail through comfortability in the world of constant volatility, where risks are prevalent, it is must go with the trade credit insurance. Indeed, it’s a well-tested and precise mechanism that continues to offer great value. In fact, trade credit insurance is not merely a precautionary measure, as it is a valuable tool that ensures 360-degree coverage for any business.

Considering the pivotal role played by trade credit insurance, it is essential to have a partner like SecureNow, a leading corporate insurance advisor, who can offer deep technical knowledge, analytical approach and expertise and help you choose the right policy.

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