Trade credit insurance, also known as export credit insurance or business credit insurance, protects accounts receivable against nonpayment risks. Demand for the coverage has been surging since the outbreak of the COVID-19 pandemic. The economic downturn is leading more companies than ever to apply for policies. Historically, trade credit insurance has been used in other countries more extensively than in the United States, but now we’re starting to catch up.
In recent years, a lot more insurance companies have started writing trade credit policies, expanding capacity and creating a buyer’s market for the coverage. Not anymore. Virtually overnight credit insurance has become a seller’s market. Capacity is scarce. If you’re seeking coverage now, you’ll need to submit a cogent and compelling application in order to get a policy.
As of this writing, insurance companies are still underwriting, offering quotes and binding new coverage, but they’re growing increasingly cautious as recession looms. It’s unknown how long policies will continue being issued. If you’re thinking about getting credit insurance, apply now.
The best way to obtain a policy quotation now is by applying for coverage on a reasonable spread of risk. Underwriters prefer to see a company’s whole sales turnover or at least all of a company’s largest customers, with no cherry-picking or adverse selection. Insuring all your A/R protects you better as well. Single-buyer credit insurance remains available but only for the strongest debtors.
A brief cover memo should accompany your application, describing the impacts of the pandemic on your company and your industry. Provide explanations and expected outcomes for any past-due accounts. Put your best foot forward by detailing your company’s credit and collections procedures, as well as any extra measures you’re taking now.
Going the extra mile will also help you get your customers underwritten. You can try submitting only buyer names and credit limits and hope for the best, but your chances for approval will improve if you can include financial statements, credit reports, payment experience (your own or other suppliers’) and information about the pandemic’s impact on your customers’ business.
In your trade credit insurance policy quotation(s), expect to see smaller aggregate limits and larger annual deductibles than in the past. Insurers are seeking to share the risk with you, not take all of it on themselves.
As of this writing, premiums have not increased across the board. At a fraction of a percent of your insurable sales, rates remain low compared with the benefits of being covered. There’s no grace period. Premium needs to be paid at policy inception for your policy to go into effect.
Non-cancelable buyer credit limits are still available in some cases, but the non-cancelability may extend for three or six months rather than an entire policy year. If a cancelable policy is your only option, you’ll be insured for sales you ship while the coverage remains in effect. If the insurer reduces or withdraws a buyer limit, you can keep extending credit or heed that feedback and revert to selling on cash in advance or letters of credit.
Some policies still feature discretionary credit limits, which provide coverage without insurer underwriting based on your own credit decisions and as long as your customers continue to pay you promptly. This is a powerful sales tool, even when it comes with the cost of a higher deductible.
It helps to have reasonable expectations. Be flexible about quoted policy terms and conditions. Some negotiation with insurance companies is still possible but be prepared to take what you can get. Right now any coverage helps you share your nonpayment risks better than no coverage.
The volume of credit insurance claims has remained relatively level since the economy recovered from the 2008-2009 recession, but now losses are climbing, and insurers anticipate an onslaught of claim filings. Insurance companies paid the trade credit claims that were filed during that last down-turn. Even if this won’t be their favorite year, they’re going to need to come through again now.
If your customer files bankruptcy or goes out of business, then your claim filing should be pretty straightforward. Following a loss from protracted default, it’s important to communicate with the insurer about who is in control of any collection efforts. Whether it’s you or the insurance company, you need to cooperate with the insurer and do everything possible to minimize the loss.
Credit insurance claims need to be filed within a fixed window of time after a receivable becomes past-due. Waiting periods and deadlines are clearly defined in your policy. Make sure to request any extensions before your filing window closes. Insurers are prepared to be flexible about slow-paying customers, but you have to keep them informed and remain in compliance with your policy.
Getting trade credit insurance claims paid is all about policy compliance. Your policy is no greater than the sum of its parts. Most of the policy’s terms and conditions are consistent with cogent credit practices anyway. Read your policy and get answers for anything you don’t understand.
The guiding principle: extend credit to your customers with as much care as if you were uninsured.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Credit Insurance 101 and Understanding Risk Management Basics for Business Owners.]
©All Rights Reserved. June, 2020. DailyDAC™, LLC d/b/a/ Financial Poise™
Gary Mendell is President of Meridian Finance Group, a company specializing for more than 25 years in cross-border equipment financing and trade credit insurance. A graduate of the University of Pennsylvania in 1976, Gary has over 40 years of experience in domestic and international sales, distribution, and finance.
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