Credit insurance covers all the commercial trade receivable under ‘Comprehensive Policy’. When the insurer finds that the individual buyer is not creditworthy, it does select the risk.
Credit insurance policies are annually renewable. Premium rate is set at the inception of the policy. The insurer declares its turnover either monthly, quarterly or annually depending upon the policy.
The renewal policy is issued at a discount of 10 to 20 percent, in non-claim. The insurer manages its trade credit relationship efficiently.
There are specific account policies which cover only certain named accounts. Single Account Policies cover a single named account. The catastrophe credit policies insure risk from catastrophic trade credit default. It carries larger premium.
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Credit insurers have started selling credit information to the sellers who will be cautious in selling their creditworthy customers that is decided on the basis of capital character and capacity.
Capital refers to the financial strength which is evaluated on the basis of 3-5 years of financial statements including balance sheet, income statement, statement of cash flows and statement of owners’ equity.
Cost records are used for contractors’ jobs. Character refers to reputation for fair and business like dealings. Capacity refers to the ability to perform which is assessed by the buyers’ capacity of operation and marketability.
Proper policy design is essential for credit insurance management. Self retention, coinsurance, limit setting, short term cover etc. are adopted for risk management. Reinsurance and risk scrutinisation are also done proper management of credit risks.