Credit insurance is a method by which suppliers are getting insurance against non payment of bills by suppliers. As there are more customers going bust the firms are increasing the premium of credit insurance which in turn will increase credit insurance cost.
It is on the basis of sales percentage that credit insurance cost is calculated. History of debt loss as well as trading history is considered in calculating credit insurance cost. Customer base of insurer as well as his trading base is also considered in calculation of credit insurance cost. Usually credit insurance cost comes to almost one percentage. But if the firm is wishing to include political risk coverage, then credit insurance cost will be higher. If the bad debt experience of a company is at an average of 0.7 % of its total sales the credit insurance cost will be less. This is even without considering various areas like risk, sales development, bank financing etc. If all such things are considered credit insurance cost will be found very less and cost effective.
As the credit insurance cost is much less when compared to other losses that the company is incurred it is always beneficial to take credit insurance. Debt collection capabilities of service provider will help you to have an increase in cash flow. This is because with a small credit insurance cost you are getting payment for all those invoices that are unpaid but are insured. Some other benefits other than bad debt losses in case of bearing credit insurance cost are:-
Indemnity level is usually much higher and is about 80% to 100% of total bills unpaid by vendor. But there will be difference to this level of indemnity on the basis of credit insurance policy you take and credit insurance cost you are bearing. Certain other factors like credit management status of the company, credit management experience of the company, portfolio of your account that is receivable, premium target of the company etc are certain other factors determining the level of indemnity. More over the insurer will get the claim within 60 days of making of claim after the losses are incurred. But if the losses are in the field of export there might be some more delay according to the waiting period specified by the country. But if the loss occurs in export due to insolvency the payment will be made in 60 days and there won’t be further delay.