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Credit Insurance and Risk Management
Michael C. Dennis, MBA, CBF

Business Credit Concepts
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Accounts receivable is often the only tangible asset on the balance sheet that is not insured. Credit insurance offers a variety of options to creditors, including insurance for:

  • Domestic and foreign accounts;

  • Foreign accounts only;

  • Only certain customers over a specific dollar exposure

  • Specific key customers only.

A credit insurance policy is designed to protect a company's accounts receivable from the effects of catastrophic credit losses, including:

  • Insolvency

  • Contract cancellation

  • Bankruptcy

  • Default by a buyer (for almost any reason)

Annual premiums can be raised or lowered by changing the annual deductible and the per loss deductible or co-payment.
Premiums are based on a variety of factors including:

  • The applicant company's past credit loss experience

  • The creditworthiness of the applicant's customers

  • The amount of coverage requested

  • The size of the annual deductible

  • The per-loss dollar deductible

  • The number of active accounts covered

  • The number of accounts excluded

  • Any discretionary automatic credit approval limit

Typically, premiums are less than 1% of the annual sales covered. There is normally an annual deductible, an annual cap on bad-debt losses, as well as a per loss deductible. Creditors must still perform credit analysis on new and existing customers, and collect from delinquent accounts.

The advantages of purchasing credit insurance include:

  • Protecting the company's receivables under a single credit insurance contract.

  • Gaining the benefits of the insurance company's expertise and experience in your market.

  • The assurance of payment not only provides peace of mind, but can also strengthen a company's balance sheet from the viewpoint of lenders, investors and stockholders.

  • The ability to offer competitive payment terms to customers.

  • The possibility that having credit insurance will increase the formula used to calculate the borrowing base.

  • The possibility that the bad debt reserve can be "drained."

Some of the disadvantages of credit insurance include:

  • The annual premium.

  • The annual deductible and per loss deductibles.

  • The fact that coverage will be denied to certain customers.

  • The fact that other customers will not qualify for the amount of amount of coverage requested.

  • The fact that insurance policies include an exclusion for losses below a certain dollar amount.

  • The fact that generally speaking the debt must be undisputed to qualify for coverage under the insurance policy.

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