Trade credit insurance, also known as credit insurance or accounts receivable insurance, is a risk management tool designed to protect businesses against the risk of non-payment or default by their customers (buyers) for goods or services sold on credit terms. Trade credit insurance provides coverage for commercial risks associated with trade credit transactions, helping businesses mitigate the financial impact of customer insolvency, protracted default, or other credit-related losses.

Here are the key components and features of trade credit insurance:

1. Protection against Non-Payment: Trade credit insurance protects businesses against the risk of non-payment or default by their customers for goods or services delivered on credit terms. It provides coverage for losses resulting from customer insolvency, bankruptcy, default, or failure to pay within the agreed-upon credit period.
2. Coverage for Commercial Risks: Trade credit insurance covers various commercial risks associated with trade credit transactions, including customer insolvency, payment default, political risks, currency inconvertibility, export/import restrictions, and trade disruptions. The insurance policy may also provide coverage for non-delivery, protracted default, or disputes with customers.
3. Risk Assessment and Underwriting: Trade credit insurers assess the creditworthiness of the insured’s customers and assign credit limits based on their financial stability, payment history, industry trends, and other factors. Insurers underwrite policies based on the insured’s sales ledger, customer profiles, and risk tolerance, determining the level of coverage and premium rates.
4. Credit Monitoring and Management: Trade credit insurers provide ongoing credit monitoring and risk management services to help insured businesses identify and mitigate credit risks. Insurers may offer credit reports, credit analysis, and credit scoring services to assess the creditworthiness of customers and monitor changes in their financial health.
5. Policy Terms and Coverage: Trade credit insurance policies typically cover a specified percentage of the insured’s accounts receivable or sales ledger, subject to deductibles, exclusions, and policy limits. The policy may provide coverage for both domestic and international trade transactions, depending on the insured’s business operations and geographical scope.
6. Claims Process: In the event of non-payment or default by a covered customer, the insured can file a claim with the trade credit insurer to recover losses. The claims process typically involves providing documentation of the unpaid invoices, evidence of default, and proof of efforts to collect payment from the customer.
7. Recovery and Indemnification: Upon approval of the claim, the trade credit insurer indemnifies the insured for the covered losses, reimbursing them for the unpaid invoices or a portion thereof. Insurers may also assist in the collection of outstanding debts from defaulting customers and provide recovery services to recover losses.
8. Premiums and Cost: Trade credit insurance premiums are based on various factors, including the insured’s sales volume, customer credit risk, industry sector, policy coverage, deductible levels, and risk management practices. Premium rates are typically calculated as a percentage of insured sales or accounts receivable.

Overall, trade credit insurance is a valuable risk management tool that helps businesses protect their cash flow, mitigate credit risks, and safeguard against losses resulting from customer non-payment or default. By providing coverage for commercial risks associated with trade credit transactions, trade credit insurance enables businesses to expand sales on credit terms, improve cash flow, and enhance financial stability.