Trade Credit Insurance (Credit Insurance) Explained

Trade Credit Insurance (TCI), commonly referred to simply as Credit Insurance, is a specialized financial product that protects sellers against the risk of non-payment of commercial debts. It ensures that a company's accounts receivable—the money owed by customers—are protected against loss due to insolvency, bankruptcy, or political risk.

I. The Role and Mechanics of Credit Insurance

1. The Core Risk Covered

Trade credit insurance covers the risk that a buyer will not pay for goods or services purchased on credit terms. This is a crucial distinction from general commercial liability or property insurance.

The main causes of non-payment covered typically include:

• Insolvency: The buyer files for bankruptcy or is legally declared insolvent.

• Protracted Default: The buyer fails to pay within a specified period (e.g., 90 or 120 days) after the payment due date, even if not formally insolvent.

• Political Risk: For international trade, non-payment due to events like currency transfer restrictions, war, or revocation of import licenses.

2. How the Policy Works

A TCI policy is not a single lump-sum coverage; rather, it is a dynamic process built around insuring a portfolio of buyers:

1. Policy Setup: The seller (insured) pays a premium based on its annual turnover, industry risk, and loss history.

2. Buyer Vetting (Credit Limits): The seller submits its list of customers (buyers) to the insurer. The insurer, leveraging its global data and credit analysts, assesses the creditworthiness of each buyer and grants a specific Credit Limit (the maximum amount the insurer will pay out if that specific buyer defaults).

3. Sales on Credit: The seller extends credit to the buyer, tracking the outstanding debt within the approved Credit Limit.

4. Claims Process: If a buyer fails to pay due to a covered reason, the seller files a claim.

5. Indemnification: The insurer compensates the seller for the loss, typically covering between 80% to 95% of the outstanding debt. The insurer then takes on the responsibility of debt collection.