Credit Insurance

Credit Insurance

Credit insurance is a funny old business. Many companies write off considerable sums through bad debts each year and the risk of a major client failing would cause great financial difficulties for many traders. This removes some of this risk, and gives protection against the 'major unforeseen catastrophe'. In addition, taking out this insurance can provide banks with added security when negotiating overdraft limits.

The credit insurance business is global and the Europeans seem to have a fair lead. Indeed, the European invasion of the American credit insurance marketplace is the catalyst for this growth. Europeans began buying U.S. insurers a few years ago because they saw America as a huge untapped market.

At the time, roughly 70 percent of all European commerce was covered by credit insurance, compared with 5 percent in the United States. Now, all the export insurers write domestic policies, too, and vice versa. Consequently, the days of the one-size-fits-all policy are gone.

To attract buyers, credit insurers have used their expanded underwriting capacity to create competitively priced policies with flexible coverage. Companies taking their first look at credit insurance, and even those taking a second look, now find themselves faced with a multitude of choices and factors to consider.

Still the fundamentals don't change. Insurers need to thoroughly understand a company's business and customers before issuing credit insurance. Besides the creditworthiness of customers, the insurer's risk is affected by the efficacy of business and credit practices.

An insurer will, therefore, want to examine bad debt history in addition to business fundamentals, including length of time in business, how long a company may have been exporting (if seeking export coverage), markets they sell to, sales history (by country if exporting) and so forth.

Most companies have easy access to this information, though not necessarily in the format the credit insurer may require. In addition, if a company does not have written credit policies, they will probably need to fill out an extensive questionnaire before getting credit insurance.

The type of product sold is also important. Customized and specialized products pose additional risks (they are hard to resell, limiting the insurer's recourse in the event of a default) compared to standardized goods or products enjoying strong demand. On the client's side, getting the right policy comes down to doing homework and building a solid relationship with a broker and ultimately with the insurer.

Then there's the whole experience of credit insurance online. Building trust offline is a big enough task. Establishing an online brand for this type of insurance is very difficult. In fact which company manages to do this may well say that they have developed the best worldwide distribution channel for credit insurance.