Trade credit insurance is attractive for suppliers for the advantages it offers. Suppliers can include new clients in the list already approved, switching to credit terms from pre-payment amid a competitive situation in their markets. As a rule, professional insurers offer policyholders a whole package of services related to credit risks management.
Although, in international practice, this type of insurance is known as trade credit insurance, in Russia it goes under different names, such as credit or commercial risks insurance or commercial (trade) credit insurance.
According to Articles 929, 933 of the Civil Code of the Russian Federation, trade credit insurance (TCI) is the insurance against risk of loss that may arise from business as a result of a failure by counterparties to fulfill their obligations to pay, or the change of conditions of such a business due to circumstances beyond the entrepreneur's control, including any risk of loss of expected earnings, i.e. entrepreneurial risk. In domestic practice, TCI is most often defined as the insurance of the policyholder's financial interests related to the risk of contingencies (losses) that may arise as a result of non-payment of commercial credits by its counterparties.
Thus, TCI is a tool protecting the suppliers' business against the risk of protracted default and counterparty bankruptcy.
Before entering the market using commercial credits, suppliers firstly analyze their own resources: determine the relative market share, sales volume, existing opportunities and threats. They also assess the creditworthiness of their potential buyers, whereby the optimal size of credits and period of payment are determined. Buyers are divided into classes according to their payment discipline, creditworthiness and payment terms offered to them. Finally, the company works out its risk management strategy.
Normally, insurers advise their customers on the best financial and insurance schemes that meet the customers' business needs.
The insurers make decision on granting insurance cover based on assessment of the potentially insured business and its counterparties. Prerequisites for eligibility for insurance cover are availability of information, transparency, business potential and constructive approach to possible reorganizations of business processes, particularly in the field of credit management.
Upon receipt of an application from the potential insured, insurers make underwriting decision based on the following information:
?€?General information about the potentially insured, e.g. experience of selling on credit terms, loss history, sales volumes, accounts receivables, risk management, previous insurance, factoring and other financial tools used.
?€?Information on counterparties, current and requested credit limits and payment terms.
The insurance is provided on whole turnover basis, i.e. all counterparties are submitted for insurance. However, only the risks of those counterparties who received credit limits are accepted for insurance. The insurer may ask the insured to assist in organizing meetings with its buyers, so called 'buyer visits.'
Upon positive decision on granting insurance cover, the insurer and the insured enter into an insurance contract. During the whole period of insurance, the insurer conducts constant monitoring of insured receivables. In case of a delay of payment the credit limit can be suspended, i.e. the insurer may recommend the insured stop shipping goods or rendering services to defaulting counterparties, and only the shipments made up to the credit limit suspension date are deemed insured. In case of protracted default a waiting period is applied. Waiting period is the period of time that runs from overdue notification date until the date of payment of indemnity, which used for loss prevention. Upon expiry of waiting period, the insurer pays an insurance indemnity and is granted with the right of recourse against the defaulting party (subrogation).
?€?Competent expert evaluation of creditworthiness of counterparties
?€?Diversification and expansion of sales
?€?Determination of adequate credit limits and payment terms
?€?Possibility to offer competitive payment terms
?€?Tighter control over accounts receivable
?€?More reliable cash flow forecast and liquidity management
?€?Reduction in bad debt reserves.
?€?Wider access to bank loans with insured accounts receivable
?€?Indemnity in case of counterparties' bankruptcy or protracted default
?€?Improved credit risk management
?€?Improved credit rating (for banks, creditors, rating agencies, investors)
?€?Better protection of shareholders' interests with additional financial security against losses
?€?Increased investment appeal of business.
Different names -- same gist
Although, in international practice, this type of insurance is known as trade credit insurance, in Russia it goes under different names, such as credit or commercial risks insurance or commercial (trade) credit insurance.
According to Articles 929, 933 of the Civil Code of the Russian Federation, trade credit insurance (TCI) is the insurance against risk of loss that may arise from business as a result of a failure by counterparties to fulfill their obligations to pay, or the change of conditions of such a business due to circumstances beyond the entrepreneur's control, including any risk of loss of expected earnings, i.e. entrepreneurial risk. In domestic practice, TCI is most often defined as the insurance of the policyholder's financial interests related to the risk of contingencies (losses) that may arise as a result of non-payment of commercial credits by its counterparties.
Thus, TCI is a tool protecting the suppliers' business against the risk of protracted default and counterparty bankruptcy.
Development of Strategy
Before entering the market using commercial credits, suppliers firstly analyze their own resources: determine the relative market share, sales volume, existing opportunities and threats. They also assess the creditworthiness of their potential buyers, whereby the optimal size of credits and period of payment are determined. Buyers are divided into classes according to their payment discipline, creditworthiness and payment terms offered to them. Finally, the company works out its risk management strategy.
Applying for Insurance
Normally, insurers advise their customers on the best financial and insurance schemes that meet the customers' business needs.
The insurers make decision on granting insurance cover based on assessment of the potentially insured business and its counterparties. Prerequisites for eligibility for insurance cover are availability of information, transparency, business potential and constructive approach to possible reorganizations of business processes, particularly in the field of credit management.
Further Steps
Upon receipt of an application from the potential insured, insurers make underwriting decision based on the following information:
?€?General information about the potentially insured, e.g. experience of selling on credit terms, loss history, sales volumes, accounts receivables, risk management, previous insurance, factoring and other financial tools used.
?€?Information on counterparties, current and requested credit limits and payment terms.
The insurance is provided on whole turnover basis, i.e. all counterparties are submitted for insurance. However, only the risks of those counterparties who received credit limits are accepted for insurance. The insurer may ask the insured to assist in organizing meetings with its buyers, so called 'buyer visits.'
Upon positive decision on granting insurance cover, the insurer and the insured enter into an insurance contract. During the whole period of insurance, the insurer conducts constant monitoring of insured receivables. In case of a delay of payment the credit limit can be suspended, i.e. the insurer may recommend the insured stop shipping goods or rendering services to defaulting counterparties, and only the shipments made up to the credit limit suspension date are deemed insured. In case of protracted default a waiting period is applied. Waiting period is the period of time that runs from overdue notification date until the date of payment of indemnity, which used for loss prevention. Upon expiry of waiting period, the insurer pays an insurance indemnity and is granted with the right of recourse against the defaulting party (subrogation).
Benefits
?€?Competent expert evaluation of creditworthiness of counterparties
?€?Diversification and expansion of sales
?€?Determination of adequate credit limits and payment terms
?€?Possibility to offer competitive payment terms
?€?Tighter control over accounts receivable
?€?More reliable cash flow forecast and liquidity management
?€?Reduction in bad debt reserves.
?€?Wider access to bank loans with insured accounts receivable
?€?Indemnity in case of counterparties' bankruptcy or protracted default
?€?Improved credit risk management
?€?Improved credit rating (for banks, creditors, rating agencies, investors)
?€?Better protection of shareholders' interests with additional financial security against losses
?€?Increased investment appeal of business.
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