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Trade Credit Insurance for Business Risk Management and Receivable Protection

Credit Insurance

Trade credit insurance covers losses from debtor non-payment due to insolvency or default. As vital corporate risk management services, these policies protect domestic and export sales, securing your business cash flow against unexpected bad debts.

Who can buy this policy?

Any business entity who sells goods or services on credit terms can purchase a Trade Credit policy. It can be an OEM, Distributor, Trader, Re-seller, or service provider.

Exclusions

The following are excluded from the scope of the policy:-

Any business entity who sells goods or services on credit terms can purchase a Trade Credit policy. It can be an OEM, Distributor, Trader, Re-seller, or service provider.

  • Sales to subsidiaries and associates

  • Sales against LOC.

  • Sales against advance payments.

  • Sales to Govt entities and to individuals

  • War and nuclear risk Genuine trade disputes.

  • Pre-shipment risk.

  • Consequential losses.

  • Foreign exchange loss.

  • Loss in excess of Credit Limits.

  • A war risk.

  • Nuclear Risk.

  • Any late payment, interest, or extra charges.

  • Goods delivered/services provided and invoiced by the Insured to a buyer after a claim arises on that buyer.

  • Non-fulfillment of terms of conditions of the sales contract.

  • Loss arising out of any quality issues.

  • Claims coverable under the standard marine policy for damage of goods.

Understanding the following terms are very important before buying a policy:

  • i). Estimated turnover: Credit policy is started based on the forecasted sales turnover for the next one year excluding sales to subsidiaries, associates, sales against LC, BG and advance payment and sales to govt and individuals.

  • ii). MLL- Maximum limit of liability: The maximum sum total of the claim that will be paid under a single policy period. Normally it is equal to 40 X the Minimum annual Premium.

  • iii).Threshold limit (non-qualifying limit): A single loss below which the claim will not be paid. Normally it ranges from 1.50 t 2.5 lakhs. It means claims above this amount will be paid subject to 85% of the loss.

  • iv). Maximum credit period (MCP): This is the maximum credit terms that the insured can offer to its buyers. The insured may choose to offer lesser credit terms internally but in case the invoice is not cleared by the MCP, a claim needs to be lodged. Standard MCP is 120 days for Domestic sales and 180 days for Export.

  • v). Maximum notification period (MNP): This is MCP+ 30 days normally.

  • vi). Claim waiting period: This is the period from claim notification to claim payment. Within this period the insurer will make all efforts to recover the default on behalf of the insured. The standard period is 150 days in case of protracted default & 30 days in case of insolvency.

  • vii). Credit Limit: The maximum exposure allowed on a particular buyer. The limit on each buyer needs to be requested by the insured and approved by the insurer. This policy works on a pre-approved limit basis, i.e., the limit on a buyer needs to be approved before invoicing.

  • viii). Discretionary credit limits (DCL): Normally in case of the number of buyers are large, the insurance company may delegate part of the limit approving authority to the insured. The insured need not come to the insurer for approval upon DCL.

  • ix). Charges: The insurance company also levies other charges such as limit monitoring fees between 2500 to 3500 per buyer and claim intervention fees of ₹ 5000 ( may change from insurance companies to ins. Companies).

  • x). Minimum premium: Normally it is 80% of the Annual Premium. This is the committed premium at the start of the policy. Please note that no refund in case turnover is not achieved.

  • xi). Insured % (Indemnity): Normally 85% of the loss amount.

The procedure of buying policies:

  • i). Submit the proposal form to the insurance company.

  • ii). Insurance companies may indicate commercial terms c. The prospect has to sign and accept the terms.

  • iii). The insurance company may conduct a formal limit underwriting of the top 10 buyers initially and another buyer after the policy is done. (We may have to share trading experience/ financials of unlisted entities).

  • iv). The insurance company will share the buyer underwriting study with the prospect in about 2 weeks.

  • v). If the prospect accepts the limits for the top 10 buyers, it pays the first installment of the minimum premium and starts the policy.

Claim procedure:

Important timelines under Credit insurance with an example.

Invoice date (01/01/2022) Maximum credit period 120 days from the invoice date.
Due date (30/04/2022)
Notification of claim with claim papers (30/05/2022) The maximum notification period is 150 days from the invoice date.
Net Debt calculation (27/10/2022) Claim waiting period 150 days from notification date.
Indemnification ( 26/11/2022) The indemnification period is 30 days from of claim waiting period.

Documents required for filing of claim:

  • i). Proof of sale (invoice and PO copy).

  • ii). Proof of delivery.

  • iii). Correspondence with the buyer.

  • iv). Steps must be taken to recover the dues from the buyer.

  • v). Debt confirmation from the liquidator in case of insolvency.