Credit Insurance

In general terms, sales ledger, debtor, client, customer insurance is the transfer of risk from one party to another (an insured to a carrier) for a consideration referred to as a premium. A credit insurance policy specifically insures the extension of credit from one company to another (your debtor) by guaranteeing, according to the terms and conditions of the policy, that the seller will be paid either by the buyer (customer) your or the insurance company.

Policies can be tailored to meet your specific needs incorporating trading conditions with clients. A general coverage policy can cover shipments to debtors through various combinations of coverage such as:

blanket limits on all your customers
coverage on specific customers for specific amounts
protection for larger accounts only where these customers represent a significant concentration of risk
or for businesses with large numbers of small balance accounts
preset limits structured around the credit agency. These agencies are either non-industry specific such as Dun & Bradstreet.

Cost of Insurance

Insurance costs depend on many factors such as: policy structure, credit worthiness of the risks involved, and the amount of retention of risk assumed by the insured. Typically a policy of domestic credit insurance would range between one tenth of one percent of sales to four tenths of one percent of sales. Additionally, the degree of risk (or quality of the customers); historical loss experience in your organisation; current credit extension and collection operating procedures; level of experience or expertise (as evaluated by the insurer) and the concentration or distribution of risk throughout your customer base is considered.

However, as with any insurance product, the quality of what is being insured, will have a bearing on the cost of the insurance. This supports the assertion that insurance should be viewed as a partnership with the credit management objective. Consequently, the better job you are doing, the more economical the insurance is in protecting your company against a catastrophic loss.

Export Credit Insurance

Like factoring, export credit insurance is a specialised line of insurance. These policies cover sales from the UK to countries world wide. Like domestic policies, they cover against the financial inability to repay for goods sold or services rendered. Premiums for export coverage generally run higher and could range from one quarter of one percent to one percent of covered sales. Many companies are finding that requiring Letters of Credit and other cash documents places an artificial obstacle between the buyer and seller, restricting growth. These companies often use credit insurance to offer open terms and be more competitive in the global market place.

Not sure how long on average debtors are taking to pay? Use our FREE interactive debtor day calculator. What would the impact of a large bad or doubtful debt be? Use our FREE bad debt interactive calculator.