Michael Sullo
Michael Sullo
Commercial-lines damage insurance broker

First things first, let’s start by defining Credit Insurance so we can properly understand the product:

Trade credit insurance, business credit insurance, export credit insurance, or credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy. This insurance product is a type of property and casualty insurance, and should not be confused with such products as credit life or credit disability insurance, which individuals obtain to protect against the risk of loss of income needed to pay debts. Trade credit insurance can include a component of political risk insurance which is offered by the same insurers to insure the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation etc.”Source: Wikipedia

In a nutshell, Credit Insurance indemnifies the insured for bad debt losses caused by non-payment (Insolvency, Protracted default – or, simply put: Slow pay, No pay)

Accounts Receivable typically represents up to 40% of a company’s total insurable assets, often holding a very important and dominating role on the balance sheet. More often than not this is the largest unidentified and uninsured asset for Canadian companies trading on open terms domestically and abroad in export markets. Given the size and importance of this uninsured asset, it is a wonder why more Canadian businesses do not see the advantage of implementing this sort of protection. Especially taking into consideration the devastating financial impact bad debts can have on a company’s liquidity and profits. In a “worst case” scenario, bad debt losses can leave a company financially devastated. By insuring this very important asset against non-payment or slow payment, a company effectively secures its cash flow and also its annual profits. As seen in the 2008 and 2009 financial crisis, companies who had Credit Insurance protection were indemnified and had their “claims paid” on these losses. Many of these companies would have not survived those turbulent times minus a Credit Insurance policy.

Beyond the “claims paid”, which is one of the more obvious and most important aspects of a Trade Credit Insurance policy (as with any other insurance product) let us take a look at the “not so typical” advantages, which are often overlooked:

Sales Growth, increased revenues and profitability

Credit insurance often contributes to sales growth with existing and new clients. Most companies have certain “credit comfort zones” when extending credit in order to mitigate or reduce risk and may be somewhat restrictive on credit which they extend to customers. Credit insurance can help increase credit limits overall by adding credit to existing customers, or implementing higher credit limits which could go beyond the insureds “credit comfort zone”, thereby creating additional revenue opportunities. Without Credit Insurance, most transactions with new clients would be concluded via pre-paid, COD or possibly not at all.

Trade Credit Insurance policy for increased financing

Typically, banks will margin up to 70-75% on uninsured Domestic receivables and ZERO on Export receivables, which makes them a non performing asset. This can be increased up to 90% for Domestic receivables and the same for Export. Banks normally ask to be named as “beneficiary” on the Credit Insurance policy.

Managing credit, risk, hedging and meeting obligations

Credit Insurance falls within the legal obligations imposed on a company’s executives, in order to hedge risks and prevent the risk of future class claims and/or lawsuits.

Optimization of credit procedures

Credit Insurance allows for increased efficiency in day to day operations and credit procedures through support from underwriters for credit risk evaluations. It also provides continued support and credit evaluation of customers, prospects, industries and countries.

Bad debt reserves

Credit Insurance can be used to reduce or eliminate bad debt reserves and can be leveraged to offer much more than a dollar for dollar amount of protection.

Securing Acquisitions

Often overlooked is the ability to secure the risk of the unknown which is typically associated with acquiring a new entity. When taking on new clients and unfamiliar trade receivables you are attaching risk to your existing portfolio. Without any preventative measure in place, your business is exposing itself to additional credit risk. With a Trade Credit Insurance policy in place, you are effectively transferring and removing that risk from your balance sheet to the insurance market in a very cost effective manner. This is especially important during the transition period.

Eliminating the need for L/C’s (Letters of Credit)

Credit Insurance covers shipments for the entire year and is non-transactional. In addition, the cost is far less. Offering open terms allows for the client (Buyer) to keep their working capital line of credit available for other uses. Open terms vs. L/C’s can be the difference in winning business or retaining business from competitors.

Political Risk

Credit Insurance offers protection against inability to obtain hard currency due to changes in import/export regulations and/or foreign government non-payment. Political risk is typically built into the export component of a Credit Insurance policy.

As you can see, Trade Credit Insurance is much more than insurance. It is an effective tool for any company that trades on open terms, wishing to take full advantage of this important and underleveraged asset, which are the accounts receivable. In my experience, most companies I have worked with have been first time purchasers of this insurance product and have not looked back since putting this protection in place. It has become an essential part of their day to day operations and forward looking business strategy. The value brought forth, over and above the “claims paid” aspect of this protection becomes very evident when properly presented.

With respect to “claims paid”, in the past year alone I have dealt with and handled close to 3 Million dollars’ worth of claims (PAID) through various insurers and have helped achieve the financial goals of many companies. One example of the aforementioned “Sales Growth” aspect of Credit Insurance is demonstrated where my client  increased sales by close to 10% in one year alone by taking on new clients, increased credit limits beyond their previous exposure levels and having claims paid to avoid cash flow disruptions. This goes to show that every component within the policy and its advantages can be used to the fullest.

Let’s give credit where credit is due… Credit insurance, when properly presented and placed is not only an insurance product to mitigate financial risk, but rather a complement to any company’s credit management process and business growth strategy.

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