A Reference site for entrepreneurs looking for information about credit management.
Credit insurance
- What risks does a credit insurance policy cover?
- What is meant by commercial and political risk ?
- What kind of services does a credit insurer offer?
- What is a credit limit?
- What is the validity of a credit limit ?
- Do I need to insure all my customers ?
- What will be the additional cost if working with CRiON?
- In what circumstances is cover of the production risk valuable ?
- What does a credit insurance policy cost ?
- What is the difference between factoring and credit insurance?
What risks does a credit insurance policy cover?
The purpose of a credit insurance policy is to compensate the policyholder for the ascertained financial losses sustained as a result of the declared insolvency (bankruptcy, private composition (viz. an out-of-court settlement or a compulsory settlement, ...) or the protracted default (inability to pay) of his debtor.
If necessary, the political (or sovereign) risk can also be covered by the credit insurance policy
What is meant by commercial and political risk ?
Commercial risk = the risk that your debtors are unable to pay the outstanding invoices because of financial reasons (declared insolvency or protracted default).
Political risk = all events which are regarded as cases of force majeure and, as a consequence of which, your overseas debtors are unable to settle their invoices, notably:
- political events, e.g. wars, revolutions or uprisings
- disasters, such as earthquakes, volcanic eruptions or tidal waves
- economic difficulties, such as a currency shortage
- actions, decisions or negligence of the authorities which are considered as government decisions
The political risk also means the cancellation of import licences or money-changing authorizations, an embargo, the making obligatory of an import licence for products which, up till then, were imported without restriction or the non-transfer of foreign currencies.
Force majeure is accepted as the cause of a claim providing that three conditions are met:
- absolute impossibility of execution
- unpredictable and unavoidable
- There is no doubt about the goods delivered by the policy holder (technical dispute)
What kind of services does a credit insurer offer?
Examination of the creditworthiness of the customer
- Prevention: Before a deal is concluded with a new customer, a credit search is carried out based on official data (balance sheets, social securities, protested bills, …) as well as on the company's own market information (sector knowledge or own payment experiences.
- Monitoring: All customers are, in a discreet fashion, monitored during the full term of the policy. The insured is kept informed of conceivable factors which might affect the client's credit rating.
Chasing up of doubtful debts
- Recovery of the debt: After the expiration of a well-defined period, the policyholder can call upon the credit insurer to get his unpaid debt recovered.
- Every conceivable legal remedy is exhausted to make the debtor pay up.
Loss coverage
- Insolvency and protracted default : indemnification is paid by the insurer after a well-defined period (specific conditions)
What is a credit limit?
This is the maximum amount the credit insurer is willing to insure.
Thus, the credit limit is the amount the insurer is ready to indemnify in case of a claim file. The indemnification will be paid in relation to the percentage of cover.
If the outstanding invoices exceed the limit, there will be no cover for the exceeding amount.
What is the validity of a credit limit ?
Some insurers want you to reconfirm the need of the existing credit limits. Other insurers keep the limits until the insured asks them to be cancelled or until the insurer decides to suspend, cancel or reduce the limit.
The cancellation by the insurer means that further deliveries are no longer covered, unless otherwise agreed with the credit insurer.
The notification of a claim file automatically cancels the existing limit.
Do I need to insure all my customers ?
Most policies insure the global turnover. This in order to avoid anti-selection. Insurers want to insure the "good" (less risk) as well as the "bad" (high risk) debtors :
the insurers want to spread the involved risk. The risk is even to be spread among a minimum number of customers. It is not obvious to insure a company having only a few customers. Extreme concentration of turnover on one single customer could be the insurer’s motive to refuse the insurance.
However, the premium is not to be paid on following sales :
- Sales without any risk: e.g. cash payment, pre-payment
- Sales to private individuals
- Intercompany sales
It is possible to exclude certain sales from the insurance, but only in case of an objective criterion.
Some examples :
- Exclusion of the political risk (insured decides only to insure the commercial risk)
- Geographical selection: e.g. only export market
- The company decides to insure the customers of a certain department or decides to insure a special type of clients
- The company decides to insure the customers reaching a well-defined level of credit
It is obvious that the above mentioned parameters will be discussed during the policy negotiations.
What will be the additional cost if working with CRiON?
Unlike traditional insurance policies (fire, motor vehicle, industrial injuries, …), in which you pay the premium to the broker, the credit insurance premium is to be paid to the insurer. The specialized credit insurance brokers are paid a fee by the insurance company. This means you will not pay an extra premium !
On the contrary, you will receive free service.
In what circumstances is cover of the production risk valuable ?
It might be possible that a customer becomes insolvent before the delivery of the goods. Cover of the production risk will indemnify the costs (e.g. the procurement of raw materials, production costs, etc.) made in the period after the confirmation of the order and before the delivery of the goods.
What does a credit insurance policy cost ?
Traditionally, the premium rate is based on the insurable turnover and is calculated in function of certain parameters :
- Insurable turnover
- Number of customers/type of business
- Insured countries
- Credit terms
- Occurred losses
Today’s premium rates generally range between 0,05 % and 1,75 %.
Other credit insurance formulas are negotiable e.g. premium to be paid on the outstanding balance or on the insured capacity.
What is the difference between factoring and credit insurance?
Factoring is a contract by which your debtor pays directly to the factoring company. It is the factoring company which monitors the incoming payments.
The factoring company may even pre-finance the sales and indemnify in case of a loss.
The most comprehensive factoring contract comprises:
- Follow-up of incoming payments
- Pre-financing
- Debt collection
- Payment of indemnification
A credit insurance policy comprises:
- Examination of the creditworthiness of one’s debtors
- Continual reassessment of the customer’s portfolio
- Debt collection
- Payment of indemnification
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