What is trade credit insurance?
Attention given to trade credit insurance in Australia is normally quite low, but the financial crisis had put a spotlight on the subject. So what is credit insurance and how can it help your business?
Unless you’re an exporter lucky enough to work on prepayment terms, you’d be familiar with the competitive advantage associated with offering generous credit terms to your international buyers. However, the worldwide economic downturn has changed the financial environment: customers are delaying payments and businesses are closing—so how can you ensure you are paid?
“Credit insurance is what I would refer to as life insurance for companies,” says Christian Vollbehr, general manager of insurance company Coface Australia. “It protects one of the key assets of the balance sheet, which is trade receivables.”
Trade credit insurance, also known as debtor insurance, indemnifies businesses against non-payment incidents and debtor insolvency. In the case of a non-payment incident, the insurer will typically pay the insured business the money owed—up to the amount covered by their specific policy—and then take measures to recover the money from the debtor.
If the debtor is insolvent, the insurer will compensate the insured business and then become your buyer’s creditor.
To take out a policy, you first need to conduct a risk assessment of your customers, usually undertaken in conjunction with the insurer. At this point, the insurer will be after key information to determine the financial health of your debtors and their exposure to risk factors.
“If we’re looking at an exporter, we’d have to get a spread of the countries that are involved,” says Vollbehr. “We’d also need to get a list of the key debtors whether domestic or export. We make an upfront assessment on what kind of coverage we can provide on those specific debtors, under a named buyer policy.”
The more details you and your buyers can supply, the more comprehensive the assessment and more likely you are to receive coverage. Vollbehr says many debtors are uncomfortable with the level of scrutiny a risk assessment invites, but if you explain that a credit insurance policy allows you to give them more competitive credit terms, most of them are happy to open their books.
Depending on your industry, your customers and the countries where they are located, your insurer will then calculate your premium. Vollbehr says to expect that amount to be between 0.15–0.4 percent of the insured amount, although this may increase due to higher risks in the current volatility of the world economy.
“Unfortunately, non-payment incidents have doubled and the loss ratio between premiums received and claims paid has doubled. There are some sectors where there’s a lack of capacity and capacity comes at a premium, so rates are going up because of the level of risk,” he reports.
Some industries are more exposed than others and may not find the coverage they require, he warns. Among these high risk sectors are building and construction, the printing industry and retail, particularly the jewellery business.
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