Trade credit insurance is an insurance policy and a risk management product offered by private insurance companies. Exporters can take advantage of an insurance policy to protect themselves from the non-payment, insolvency or bankruptcy of their customers. Naturally, securing export credit insurance requires the payment of premiums. Insurance premiums are based on individual risk factors such as the buyer’s creditworthiness (as assessed by the entity that provides the insurance coverage) and the countries involved in the transaction. Depending on circumstances, such insurance can often be purchased either on a single-buyer basis or on a ‘portfolio’ multi-buyer basis.
Sounds great but there are pitfalls that any business needs to consider before choosing trade credit insurance.
- Export credit insurance is not available in all situations. Insurers may not offer policies for specific types of goods or for shipments to specific countries or businesses. When insurers do offer export credit insurance, it is common for them not to cover the entire amount of the shipment. For instance, a company requesting a £1 million export credit insurance policy may only be eligible for a £500,000 policy, less annual and per-loss deductible payments.
- Dispute – if there is a dispute between you and your buyer normally the insurer will reject the request for claims payment until a settlement of the dispute can be reached and the buyer’s liability is established. Trade partners overseas can claim a dispute to delay or eliminate legal action.
- It is easy to fail to comply with insurance conditions and to have the claim rejected because of failure to observe imposed conditions. The insurance company will likely demand regular accounting of all export accounts from the business, good contract management systems and evidence of credit control.
- Typically, the policy will only pay out a percentage of the value of your outstanding invoices over a given term (e.g. 12 months). If you make a claim, the policy will only pay out a given percentage of the outstanding debt owed. This varies significantly but can be less than 75%.
- The insurance company will make the decision about whether your buyer is credit worthy. Generally, only certain kinds of clients and a certain percentage of the loss will be covered.
- There is evidence that trade credit insurance can lead to risky financial behaviour. Businesses can be tempted to engage customers who are considered a risk, customers who might otherwise be ignored. The possibility of default and bad faith increases, leading insurance firms to become stricter about what is covered”.
- Trade credit insurance is a cost in terms of premium and cost in terms of set up and management, whether you make a claim or not. Escrow is a more cost effective and efficient alternative.
- Trade Credit Insurance is designed for export risk, escrow can be used in the UK market and abroad.