What is Credit Insurance?
Credit Insurance protects your accounts receivable against non-payment.
In other words, Credit Insurance pays you when your customer (debtor) does not, simple as that!
Who Uses Credit Insurance?
If your business sells to other businesses on open account, you should consider using credit insurance. All open account sales involve risk. The more customers you have on open account the greater the risk.
What are the Benefits of Credit Insurance?
It is commonly used to increase sales, increase borrowing availability and catastrophic loss prevention, and more importantly, ensure protection against non-payment.
Credit Insurance affords political risk (the inability to convert currency in a foreign country) coverage on export receivables.
Credit Insurance allows your company to increase sales by expanding credit lines to existing clients, and offering credit to new clients. It can also assist in accounts receivable financing and a lender can be named as beneficiary under the contract.
The tables below illustrate the benefits of Credit Insurance.
| Without Insurance | With Insurance |
|---|---|
| Hire an attorney or collection agency | Insurance company handles |
| The business faces a higher risk of loss and increased risk of bankrupcy | The risk of loss decreases |
| Lengthy time in court | Insurance company handles |
| Many receive pennies on the dollar | Insurance company handles |
| Without Insurance | With Insurance |
|---|---|
| 70-80% Advance Rate on domestic Sales | Up to 90% Advance Rate on domestic sales |
| 0% Advance Rate Advance Rate on exports | Up to 90% Advance Rate on export sales |
| Banks will not lend more money due to the higher risk of loss | Banks will lend more money because of the protection |
| Without Insurance | With Insurance |
|---|---|
| Miss sales quotas | Make sales quotas |
| Reduced market - Reduced sales | Expanded market - Expanded sales |
| Misconceptions | Reality |
|---|---|
| Insurance companies only take strong debtors | You can insure some or all of your debtors |
| Insurance companies do not cover disputes | If a dispute occurs, the Credit Insurance carrier provides a path to resolve the dispute |
| Debtor must be insolvent | Policies pay in the event of insolvency, slow pay and political risk |
| Costs more to use a broker than buying direct from the insurance company | Admitted carriers file their rates with the state insurance commisioner. Premium is the same |
Accounts receivable insurance carriers have many different ways to compute premium rates such as sales (coverage, A/R, flat rate, and limit of liability base pricing methodologies, just to name a few). Please know all carriers look for a reasonable spread of risk. If you have one troubled debtor and trying to lay off that one risk, this product is probably not for you.
The two most common methods of computing premium rates are annual insured sales based pricing and coverage based pricing.
Many factors go into determining the net annualized premium rate: policy face, industry risk, debtor pool average financial stress score, deductible, co-insurance, and policy features. Generally speaking, the premium is calculated at a rate between $.10 - $.20 cents per $100 of domestic insured sales. This is typically for terms of sale up to 60 to 90 days. Terms of sale n7, n14, n21 up to n30, have lower rates. Export insured sales are calculated at rate between $.20 - $.30 cents per $100 of insured sales. Of course, concentrations in either high-risk countries or high-risk debtors can cause these rates to change.
When domestic and export sales are combined, there can be a blended rate or there can be a specified domestic rate and a specified export rate.
Below is an example of how annual insured sales based pricing works. It is an illustration only. Larger companies with more insured sales/coverage can expect to pay lower rates.
Example:
| $50 million domestic sales |
| x $.10 (per $100 of sales) |
| = $50,000 premium |
The same factors as annual insured sales based affect the pricing of coverage based.
Below is an example of how coverage based pricing works. It is an illustration only.
Example:
| $5,000,000 of coverage |
| x $10/000 of coverage |
| = $50,000 premium |
Each of these methods have their own strengths and weaknesses. There is no perfect way to price credit insurance. As a general rule of thumb, if you are regularly making changes and need coverage decisions from the carrier, annual insured sales based pricing is often a good solution. If you have stable clients and coverage needs (not frequently adding, removing, increasing, decreasing) coverage based pricing may be a better fit for your company.
Working with a specialist can help you determine the best custom solution for your unique needs.
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See how much more you can borrow by having Credit Insurance.