Credit insurance policies are the method of gaining coverage for non paid debts of the insurer. Credit insurance policies provide partial or full coverage to debts that remains unpaid due to certain incidents that comes under the terms and conditions of the policy. The issue might be insolvency or default caused by the insurer. In certain countries the insurers are also given political risk cover under credit insurance policies.
Certain events like bankruptcy, administrative receivership, administration, liquidation, death etc are covered by credit insurance policies. Non payment of debt by the policy holder after due date is also covered by credit insurance policies. Other than this certain political risks are also covered by credit insurance policies. Delay in payments or restriction in payments due to certain instances like
Credit insurance policies provide a credit opinion financial backing. This is helpful for it is not easy to understand whether trading on credit terms is safe just on the basis of status reports. This is more fluctuating in an economy where trading positions of company changes daily.
Credit insurance policies provide protection to your assets in business. The asset of a business varies from 40% in manufacturing industry to 90% in service sector. This much assets can not be left to risk in a stable trading condition too.
If a company is having some bad debt it will have some detrimental effect on the profitability of company. If a company with $million turnover has a profit margin of 10% and is having bad debt of $50,000 the company will have to generate additional turnover of $500,000 must be generated for covering loss. Some companies have a specific reserve or a provision for bad debt. But such a reserve might not be enough for covering major exposures and working capital usage might not be efficient for this. In such cases credit insurance policies will be of great help to insurer of this policy.
If a company is trading in cross border then the risk is high to the seller. Currency fluctuations and other complications makes financial situation more stringent. More over financial information are not available easily. Government’s foreign action can affect trading relations drastically. Though letters of credit provides some amount of security and flexibility to seller as well as provides with working capital of customer it is not easy to gain credibility. With credit insurance policies letter of credit is not at all necessary for trading people.
Thus, credit insurance policies are important measures to cover many events like bankruptcy, administrative receivership, administration, liquidation, death. As all these are unexpected as well as urgent issues that may occur in life these types of policies play a very important role in everyone’s life.