Commercial Credit Insurance Offers Benefits to Businesses: Credit Insurance Is an Indispensable Tool for Minimizing the Risk of Doing Business

By Gan, Steven | The RMA Journal, October 2010 | Go to article overview

Commercial Credit Insurance Offers Benefits to Businesses: Credit Insurance Is an Indispensable Tool for Minimizing the Risk of Doing Business


Gan, Steven, The RMA Journal


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COMMERCIAL CREDIT RISK is the risk involved in selling products or services from one company to another on the basis of trust. If company A sells to company B without receiving payment up front, it's because company A believes company B is trustworthy--that is, creditworthy--and that company B will pay company A after the goods are received. It's a simple concept, but not understanding how to manage commercial credit risk can have a profound impact on a company's stability.

A comprehensive credit risk management system can use a range of credit risk products, services, and solutions to fulfill five key objectives:

1. Safeguard assets (cash, accounts receivable, and inventory).

2. Increase cash flow.

3. Expand sales safely.

4. Minimize the risk of selling on credit.

5. Support working capital requirements.

What Is Credit Insurance?

Credit insurance (also known as accounts receivable insurance) can play a vital role in strengthening a company's total credit risk management system. Credit insurance is a before-sales credit risk management product that insures commercial accounts receivable against nonpayment. If a company's customer defaults on payment or goes bankrupt, the company will still be paid, subject to the terms and conditions of the policy. These terms and conditions include the deductible, co-insurance, and buyer coverage limits. By assuring payment, the policy supports the stability and growth of the insured company.

Although credit insurance is not as widely used in the United States as in Europe, it is a multibillion-dollar industry. The credit insurance industry has 10 major carriers: Atradius, Euler Hermes ACI, Coface North America, FCIA, QBE, EXIM (Export-Import Bank of the United States), Charter, Lloyds, Chubb Group, and Zurich. All of these credit insurance carriers are highly rated. Moody's, for example, has assigned them a rating of at least Aa.

Some carriers underwrite both domestic and export credit insurance, while others concentrate only on export credit insurance. Some provide a variety of credit risk services, such as credit reports and debt collection, while others offer only credit insurance coverage. Credit insurance policies are very flexible and can be tailored to fit the insured's needs, which will depend on the industry, the firm's history of losses, and the creditworthiness of its customers.

At the most basic level, credit risk insurance protects a company from unexpected losses due to the insolvency or payment default of its customers. The above-mentioned underwriters who specialize in this unique coverage will, in most cases, also conduct credit evaluations of the buyers a company wishes to insure and approve them for specific credit limits. The credit limits are based on requests by the insured and the results of the credit research. Given this active credit evaluation by the insurer, credit insurance should be approached as a tool that every company can use to grant credit to customers while sheltering itself from possible losses.

Benefits of Credit Insurance

Catastrophic Loss Protection

This year, the Gulf Coast of the United States has endured an unprecedented oil spill. Thousands of businesses have been and will be severely damaged, and some will go bankrupt. The suppliers to those businesses also will be severely impacted, and the ripples will extend throughout the entire business community. Suppliers that have accounts receivable covered under credit insurance, however, will be better able to weather the severe economic impact.

Across most industries and companies of all sizes, it is generally true that the top 20% of accounts represent about 80% of the company's revenue. In some cases, there can be a concentration of credit exposure among a few customers or even just one key customer. In this situation, one sudden, unexpected loss can have a devastating impact on a business. …

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