Money owed to a business by its customers is often one of the largest single items on a balance sheet. If the money owed is not paid, the business suffers a loss. This potential loss through non-payment can be insured by means of a credit insurance policy.
This insurance is provided for losses due to a debtor’s inability to pay, usually because of going into liquidation or ceasing to exist or to trade. Credit insurance does not cover non-payment through unwillingness to pay, or through the insured’s inability to collect.
There are two types of credit Insurance available in the market:
- A whole of turnover insurance policy that insures the whole of their turnover against the risk of debtors defaulting;
- A specific account insurance policy that insures a selective accounts that are felt to be at risk. Premiums are higher for this type of policy due to potential selection against insurers.
For whole turnover insurance policies, there is usually a coinsurance clause ranging from 5% to 25%, depending on the volatility of the trade involved. This ensures that the insured always has a direct financial stake and incentive to get their credit accounts and their credit control procedures right. Insurance Cover is subject to a policy limit of indemnity and it can be arranged for a fixed period of twelve months or for the length of a specific contract.