Are there any additional benefits?
Credit insurers have developed sophisticated data analysis tools that can provide you with the latest intelligence on your company and the economy. They can provide a credit evaluation service, which will help their policyholders decide on the best level of credit for each of their customers, or provide the policyholders the ability to set their own insured credit limits.
How does credit insurance work?
A typical policy covers a total debtor portfolio or a selection of key customers. To activate the coverage, you establish credit lines on your customers, either internally or via the credit insurer’s in-house resources. Premiums can be charged on the credit line, on outstanding receivables or on turnover (sales). Claims are paid at 85 to 100 percent of the bad debt after an agreed grace/waiting period (e.g. 30 days for insolvency).
Why do companies need credit insurance?
Companies typically buy credit insurance to reduce or transfer the risk of nonpayment from their balance sheets to an insurance company, to increase their ability to borrow against receivables, to be more competitive by offering longer terms of sale or increased credit lines to their buyers, to be able to safely enter new markets, and to be able to safely offer terms to new buyers.
Has the need for credit insurance increased as international business has increased?
Yes. Credit insurance is very common in Europe. Because of this, European companies are more willing to offer payment terms when they export. Companies in the United States have found that they have to offer similar terms to be competitive. Many companies have turned to credit insurance as a way of mitigating the risk of offering credit terms when they export. Another reason for this is that the leading credit insurers have extensive databases of financial information that their insureds can tap into to help them make more informed credit decisions in foreign markets.
Do all companies need credit insurance?
As we are seeing today, any company can suddenly find itself having financial difficulties. I don’t think there are very many buyers of unquestionable credit quality remaining. I would say that unless a company derives all of its revenue from sales to the U.S. government, there is a reason to insure your receivables against a sudden financial meltdown.
What else should companies know about credit insurance?
Over the past couple of years, credit insurance has become a lot less expensive than it was in the past. Even though the market is beginning to change, rates are still relatively low and quality coverage is available.
Brian Slife is a vice president and account executive with Aon Risk Services Inc. (www.aon.com), a risk management, human capital and reinsurance consulting firm based in Cleveland. Reach him at (216) 623-4112 or [email protected].