Trade credit insurance policies protect companies against the risk of non-payment, typically following insolvency or default of your customer.
The purpose of trade credit insurance is to protect your business from bad debts. In practice this means that any failure in your customers paying for goods or services can be covered by a credit insurance policy.
This provides a safety net keeping your company solvent, and functional and allowing you to focus on the key areas of your own business rather than trying to identify the difficulties of your customer. Furthermore, trade credit insurers can point you in the direction of the better-performing businesses in your sector, this allows you to increase sales safely in the knowledge that you have an unknown risk protected by a known cost.
Trade credit insurance cover is particularly useful in times of economic uncertainty, but also for companies moving into new markets and territories, which may come with a greater level of uncertainty.
What is Covered by Trade Credit Policy?
The cover can protect the entire sales ledger, but options are available to insure key customers or even single risks. For businesses that are willing to retain meaningful levels of bad debt, catastrophe credit insurance is also available. Single invoice cover is attainable from selective insurers.
All policies are bespoke and at Xenia we offer advice on the extent to which credit risk can be controlled, retained and transferred to insurers.
Types of Trade Credit Insurance Policies
This is the most popular type of policy. It covers your entire sales ledger against non-payment through default or insolvency and is structured to suit your company’s specific needs and objectives. It can be extended to include political risk should you supply export markets. These policies have a modest excess to exclude smaller predictable losses, and typically 90% indemnity is offered on each qualifying loss. There is a blended premium rate, which encompasses all customers whatever their risk rating. Larger customers are usually vetted via the insurer's online system supported by Xenia’s Account Management team. For more modest debtors the client will usually have the ability to agree cover based on pre-agreed processes.
Single risk trade credit insurance provides protection against the insolvency of a specified customer which can be for debt already invoiced and costs of your work in progress incurred prior to the failure of your debtor. Indemnity is typically between 90-95% of the credit limit agreed. The period of cover is flexible, and can be arranged on an annual basis or for the time frame of a specific contract with premiums based on the insurer's calculation of the risk rating of your customer.
As part of a risk management strategy a business can decide to fund bad debts up to an agreed amount, set at a level where the cumulative impact of losses is not deemed to have an adverse impact on profitability. A catastrophe trade credit insurance policy is in effect reinsuring credit management systems, whilst ensuring the company is protected against a major, unforeseen failure, or series of larger losses. There are insurers who specialise in catastrophe credit insurance.
Top-up policies allow access to additional insurer protection on the same risk(s). This may be due to the size of the facility or due to the restricted appetite on a customer or market. This can be used on a Single Account, Catastrophe or Whole Turnover policy.
Sales ledgers change daily and therefore it is crucial that your trade credit insurance arrangements are flexible so that limits increase and decrease keeping premium at an appropriate level. Some insurers are prepared to provide their credit limits on a non-cancellable basis, meaning that they will not cancel cover during the policy period. This usually means a higher premium or a greater risk share. Good credit management disciplines are also required in such cases.
See also
Benefits of Trade Credit Insurance
Trade credit insurance is a dynamic form of insurance, adapting as customer profiles and business needs change. It provides many benefits to your business.
Trade Credit Insurance for Export Businesses
Trade credit insurance is highly valuable for export businesses as it helps them navigate and manage risks associated with international trade transactions.
Why Xenia?
Our team of experienced trade credit insurance specialists work in collaboration and close partnership with our clients ensuring we achieve the very best possible result for you. We have:
- Close relationships with key underwriters in our market
- Extensive knowledge of trade sectors
- Reputation for negotiating policies for new entrants into the market
- Investment in continuous training and development of our staff
- Local offices across the UK
Xenia is one of the largest trade credit insurance brokers in the UK. We can place cover for trade credit risks and surety bonds in the UK, Ireland, across Europe and the US, and can support your other business insurance requirements via our parent company Brown & Brown.