More about credit insurance
Credit insurance comes in vision when you sell at open account to buyers. Needless to say that a lot of business is done without granting credit terms to buyers. Think of retail where the consumer pays in cash. In this situation you would propably have less worries than when you deliver on open account and the buyer starts fully enjoying the payment terms. Those worries you can forward to a credit insurance company.
Short and middle term credit
Short term credit is credit that is given when selling consumer goods, raw materials, semimanufactured products and services. The term of credit, or payment term, is within 360 days and depends on the nature of the goods and what is common practice in the branch. For m ost goods like flowers, fruit and vegetables, fish and meat products a few weeks credit is the maximum. For capital goods longer credit terms are granted. In general those terms do not exceed 180 days after delivery of the goods.
For capital goods such as airoplanes, payment terms of more than 360 days apply: middle term credit. In some cases this can be up to 10 years.
The risks Finance & Insurance is insuring involve the risks in transactions between companies. Credit terms to praivate persons are not insurable. The same goes for credit terms given to government institutions like counties and ministeries and other institutions without corporate personality and separate property.
[top]
Political risk
The majority of the insured turnovers is in private hands. This means that the premium will be paid to the insurance company and that the insurance company pays for the losses.
Most of the insured risks on buyers in OECD countries are taken by private companies. Exporting to some OECD countries and non-OECD countries might also involve risks other than not getting paid, and that is the risk that the country you are exporting to is not living up to its international obligation to pay.
This risk is called political risk. This can also be insured. Note: The criteria of what political risk exactly is and what is actually insured can differ per insurance company.
Securing your credit risks
What possibilities do you have to secure your credit risks?
[top]
Domestic buyers
Your business is domestic and your are giving credit to your buyers because asking to pay in advance, or cash, is not common practice in your line of business
Your domestic transactions are subject to Dutch law. Dutch lawbooks on Commerce, Contracts, Insolvency, amongst other, are the fundaments for establishing and executing your transactions.
The insurance company also makes use of these fundamnets when insuring your credit to domestic buyers.
Buyers abroad
Dutch law does not always help out when exporting and the credit risks involved. Not only is there a commercial risk on the buyer, there is also the political risk on the country where the buyer is located.
[top]
Which risks can you insure?
Insurance companies cover the risk of not getting paid as a result of insolvency or protracted default of the buyer. Insolvency is:
- bankruptcy
- suspension of payment
- private settlement
- Execution, not leading to partial or full payment of the outstanding debt.
Protracted default is in most policies described as the situation in which a buyer has not paid you within six months after the initial due date, unless this is caused by circumstances beyond one's control, political circumstances or any form of violence in a society.
There are also other important conditions to be taken into account to get indemnification.
- the claim may not be disputed by the buyer or his curator;
- the claim must be within a valid credit limit on the buyer;
- the claim may not originate from the moment that an earlier claim had not been paid 60 days after the due date.
Risks which can not be insured with a credit insurance:
- devaluation of foreign currency
- damage due to transport
- seizure by creditors
- faulty or incomplete contract
- faulty CMR
- caused by intermediairs
[top]
Ondisputed claims
In the policy there is the condition that the claim must be undisputed. There is a reason for this. The insurance company only indemnifies when the claim, that has to be indemnified, has been transferred. After indemnification the insurance company will try to get money back from the buyer. As well as in her own interest as in the interest of the insured party who has also an own risk. This own risk can vary between 5% and 25%.
When the buyer, or the curator, disputes the claim, debt collection by the insurer is doomed to fail. Credit insurance covers the risk that a buyer, who has to pay, cannot pay. Credit insurance companies will not and cannot insure the risks of non payment due to the delivery of faulty (or not agreed upon) goods.
When an undisputed claim has been paid, the insurer will try to get their money back through debt collection. Depending on the conditions of the insurance company the money collected will, or will not be, divided between insured and insurer according to boths share in the loss.
Costs for debt collection also insured
Besides indemnification for covered claims by the insurer, the insured can also claim indemnification for the debt collection costs he made with the approval of the insurance company. In many cases the insurance company will also execute the debt collection.
In these cases the costs for debt collection are also 100% covered, or for the coverage percentage mentioned in the policy
[top]
Co-insurance fabrication risk (pre-risk)
Credit risk starts as soon as goods are underway or services performed.
But already in an earlier stage you as a supplier start to run risk: In the period from accepting an order and starting to deliver goods or performing a service. When a buyer goes bankrupt in this period, then coverage is stopped.
With a credit insurance that only covers the credit risk, no new orders can be accepted from this buyer. But imagine that you have accepted a big order from a client: you have bought material, you are already fabricating and you have already done the biggest part of the job.
When things go wrong with the buyer, or his country, at that stage, an insurance company can offer you coverage. This is what we call fabrication risk. When you co-insure the fabrication risk the coverage of the credit insurance starts at the moment of order acceptance. If a claim occurs before goods are underway or services performed, then the insurance company indemnifies you, for the covered percentage, the costs you made, up to the moment the claim occurred, involved with the specific order.
What can go wrong in this period? We already mentioned bankruptcy of the buyer. Next to that you can think of other form of insolvency as well as protracted default. The buyer can withdraw the order after you started making costs. The country where the buyer is located can declare an import stop. The insurance company can cancel coverage on the buyer or its country.
If you did not co-insure the fabrication risk, in such cases you will have to decide whether to proceed with the order at your own risk, or stop the production.
But what when the insurance company cancels the coverage on the buyer while you are producing, or even worse, on the country where the buyer is located? If you cannot deliver the goods and with that you fail to your obligations, your buyer will file a claim. Who will pay for that? The answer is: the insurance company.
[top]
The price of the policy
The premium depends on information and circumstances that determine the height of the risks that have to be insured.
- what kind of insurance (when starts the risk for the insurance company);
- the volume of the insurable turnover;
- spreading of risk (number of buyers, divided over several countries);
- terms of delivery and payment conditions;
- the average extension of the payment condition;
- the finacial situation and morale of the buyers;
- the line of business of the insured party;
- experience of the insured with the buyers;
- the countries where the buyers are located;
- the line of business and the nature of the goods;
- The coverage percentage.
Enough issues to get to a specific premium for every insured party
You want a indication?
To give you an indication: with a 30 days payment condition, 85% coverage, based on a turnover of ± € 10 miljoen a premium of 0,2/0,3% is possible. With a larger turnover and more spreading of risk a premium of 0,1% is possible, lesser volume and less spreading can lead to 0,4/0,5%
The price will of course depend on economical developments and the pricing policy of the insurers. If one year the insurance companies make big losses the premium will go up, and the next year increasing competition can make the premium go down again.
Partially you can influence the price of a credit insurance yourself. Most policies has a bonus/surcharge systeem depending on premium paid and loss ratio in the past insurance period. An insured companie can influence the price of the policy by not claiming losses.
[top]
Credit limit per buyer
Probably more important than the price of a policy is the safety that it offers. Every outstanding amount is a credit risk. An amount that remains unpaid whenever the risks described in the policy occurs. This amount has to be covered by a credit limit, per buyer.
In most cases the insured himself can establish a credit limit up to an amount of ± € 12.500 using policy guidelines. This is the so called discretionary limit.
An insured company can also apply for a credit limit with the insurer and he is obliged to do that for amounts higher than the discretionary limit of € 12.500. The insurer will establish a credit limit as soon as possible and with this limit the amount outstanding of the specific buyer is covered. If the creditworthiness of the buyer is judged insuffient or if there is no creditworthiness at all, the insurer can establish a lower limit than asked for, or give no limit at all (a 0-limit)
This doesn't mean that it is prohibited to do business with this buyer, but the insured is then acting at his own risk.
It is of course not beneficial for the insurer to give insuffient limits or no limits at all. No cover also means no premium. If an insurer is rejecting limits often, they will lose clients.
The insurance companies, because of the commercial relationship with their clients, give a motivation for the limits they issue.
It goes without saying, that the information given by the insurer prevents companies to do business with financially weak buyers.
Like businessmen cannot predict how a buyer will behave and develop, the insurance company is also not always able to predict that either. Credit insurance is looking ahead and the insurers made it their trade to keep a close eye on the buyers that they cover. When thing go wrong with these buyers the insurers are available to start debt collection for the insured and to indemnify the loss suffered.
[top]
© 2007 Finance & Insurance.
|
