by Pieter Dingemans ,
Credit Specialties Leader, Middle East and Africa
23/04/2022 · 3 minute read
In an unpredictable and turbulent economic environment, trade credit insurance can support business growth and provide peace of mind to organisations by ensuring they are covered should new or existing clients be unable to pay due to financial difficulties. A policy can secure or increase funding by insuring one of your largest assets – your trade debtor book as well as help your business to achieve a high quality credit management process by providing a framework to manage your credit accounts.
When overseeing the purchase of a trade credit insurance policy, an experienced insurance broker and risk advisor can support you to ensure you embed the key considerations features of your policy and ensure you mitigate the risk of non-payment by your debtors:
The credit terms and the contract of sale (T&C’s) agreed with your buyers are the basis of every deal you do and stipulate the conditions of sale. These should been viewed in conjunction with the terms and conditions outlined in your trade credit insurance policy. Why? No trade agreement is the same and every sector has its own characteristics when granting credit terms as well as payment behaviours. Insurers often offer their standard wording and conditions that doesn’t necessarily cater for these industry nuances and non-standard trade agreements. A miss-match could leave your business exposed and uninsured. It’s key to understand how your current sale agreement and your execution of it match up to your policy conditions and wording.
A trade credit insurance policy could be considered a corporate credit management procedure. The policy sets out clear timelines as to when certain credit management actions need to take place - in order to have a valid claim under the policy.
Every insurer has different policy rules and timelines and it is key to understand when you implement trade credit insurance policy, or change insurers, that your current credit management procedure aligns to the policy wording and conditions.
A trade credit insurance policy can be structured according your organisation’s unique requirements and risk appetite. It is therefore recommendable to have a clear view on specifics and how much risk your business is willing to take.
A “risk bearing capacity” test can assist you by providing more insight into what financial loss you are potential willing to take without putting your business continuity at risk. Together with a “probability of default”and loss given default analysis, you can make informed decisions on the optimal insurance structure for your business.
As the macroeconomic environment looks to remain volatile with credit insurers predicting an increase in insolvencies, it is all the more vital for CFOs, Financial Managers, Treasury and Credit Managers to adopt a full-reaching credit risk management strategy to ensure the long-term success of their business.
Reach out to our insurance brokers and specialty risk advisors to see how we can support the sustainable growth of your business.