What does Trade Credit Insurance cover?

Trade credit insurance provides cover for businesses if customers who owe money for products or services do not pay their debts, or pay them later than the payment terms dictate. It gives businesses the confidence to extend credit to new customers and improves access to funding, often at more competitive rates. Trade credit insurance is for products and services that are due within 12 months.

Trade credit insurers will generally cover two types of risk that a business will include in their cover:

• Commercial risk - the risk that the policyholder’s customers are unable to pay the outstanding invoices because of financial reasons, for example, declared insolvency or protracted default.
• Political risk - non-payment as a result of events outside the policyholder or their customer’s control, due to political events (wars, revolutions); disasters, (earthquakes, hurricanes); or economic difficulties (currency shortages meaning inability to transfer money owed from one country to another).

As part of the policy, the trade credit insurer will monitor the policyholder’s customers, assigning each of them a credit limit, which is the amount the insurer will protect the policyholder if that customer fails to pay. 

Monitoring of a policyholder’s customers can be done using a variety of sources, for example:

• Financial statements 
• Information supplied by other policyholders that sell to the same customer 
• Public records 
• Visits to the policyholder’s customer 

As well as providing protection against non-payment, trade credit insurance gives the policyholder access to an extensive information network which acts as an effective early warning mechanism for adverse economic or customer trends. The relationship between the insurer and the policyholder does not remain static as the trade credit insurer will be there to support a company when trading.  

Throughout the lifetime of the policy, the trade credit insurer will inform the policyholder of any changes that might impact the financial health of their customers and their ability to pay them for goods or services delivered. They will then establish a plan with the policyholder to mitigate the risk. 

The terms of cover may change over the lifetime of the policy to reflect the financial strength of any customer and it is the responsibility of the insurer to proactively monitor its policyholder’s customers, to ensure their continued creditworthiness. 

During the policy period, the policyholder may request additional coverage for trade with any of its customers. The trade credit insurer will then evaluate the risk of increasing cover and either approve or decline the additional credit limit request, with a clear and timely explanation. Policyholders can also request a credit limit for a new customer under an existing policy.