Is trade credit insurance always good value?

This is always a good question for any company to ask with a critical mass of diverse pools of receivables. Of course the answer will depend on what jurisdiction you live in, but it appears we now have more credit risk mitigation choices for both multinational and mid-market companies than ever before.

The best thing you can do is find yourself a broker that can educate and orient you to these myriad of changes and then you can make an informed decision. As they say, date your insurer, marry your broker. The best service you can do for your own employer in managing enterprise level credit risk is to get educated.

Here are a few questions to ask of your broker:

  1. Do all receivables need to be insured? Or asked differently, can I "carve out" certain companies that don’t require insurance, such as large customers or ones based in certain locations.
  2. Can I insure just those receivables within a certain product segment, customer segment or subsidiary?
  3. Is the insurance done on a cancellable basis, meaning that even in the event of a credit quality deterioration on the part of the insured customer(s), the insurer can reduce or cancel its credit limit commitment for the 12 month insurance period.
  4. How much more do I have to pay for non-cancellable coverage?
  5. What is your claims handling procedures?
  6. What fine print do I need to be aware of in the contract?
  7. What is an indicative fee I would expect to pay? Industry standard indicates the range could be anywhere from 5 basis points to 200 bps at the high end (for purely emerging market credit exposure with longer tenors). According to Marc Wagman at Aequus Trade Credit, the vast majority of policies which get underwritten for purely domestic credit risk happen at less than 20bps/annum on revenues. For purely foreign credit risk, it's typically less than 40bps/annum on insured revenues.
  8. What other alternatives do I have to ensure specific risks, and are they economical? Receivable puts and credit default swaps can be used in select situations.

The world is not getting any less risky. Like any insurance, get to know your policy and understand it. Most of us probably do not when it comes to our own home. But a rise in delinquent accounts can severely hamper a business, particularly a small or medium size one.

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First Voice

  1. James Robertson:

    Credit insurance is a powerful risk management product but unfortunately a little known one. I agree, it’s important to ask as many questions as possible to ensure that the product is tailored to a client’s needs. Generally speaking we see premiums around 30bps depending on different aspects of the client – industry, bad debt history, quality of buyers, turnover size, number of buyers, etc. One question that I would add is to ask your broker about the different insurers, their strengths, weakness’, and the differences in their policies.

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