Trade Credit Insurance (TCI) is a dynamic, financial risk management tool designed to protect accounts receivable, an asset which typically represents a large percentage of total company assets yet is often unprotected. Protection is provided against unexpected bad debt losses. Coverage typically extends to protracted default (slow pay) and insolvency events. Coverage can also extend to a range of political risk events on foreign receivables.
One of the unique features of TCI is that unlike other insurance policies which respond only in the event of a loss, a TCI policy can be a reliable business tool utilized for more than just risk mitigation. For example:
There are a number of ways a TCI policy can increase sales, which can recapture premium dollars. First, a TCI policy may allow for higher credit limits or more favorable terms for known buyers. Second, it enables a company to safely explore extending open account terms for unknown buyers. The policy is particularly useful when used to insure foreign buyers. Policyholders can not only rely on the carrier's financial expertise to ascertain the creditworthiness of their foreign prospects but they can also rely on the carrier as a resource to provide global market, political and legal intelligence, representing a real value add.
Note, export credit insurance can be more cost effective and less administrative compared to letters of credit.
Credit assessment is a daunting task. It can be a relief to share that task with other experts. A TCI policy provides access to underwriters who are industry-specific financial analysts. Relying on their expertise to make credit decisions, choosing to outsource credit responsibilities, is another real value add, saving the policyholder time and resources.
If AR is offered as collateral, TCI can provide additional protection to the lender (they will be added as a loss payee on the policy) allowing an increase in the advance percentage; or, they may include accounts previously considered too risky to include. TCI becomes the solution to maximizing the amount of working capital available.
Final note regarding the benefits of a TCI policy. The cost of the policy becomes an expense which reduces tax liability. Bad debt reserve will reduce, which will strengthen the income statement.
Another unique feature of TCI is the ability to create bespoke policies. Considering the motivation for the policy, the business goals and budget, there are a host of creative ways to structure a TCI policy. The client may choose to insure their entire portfolio, or a select group of accounts or even a single buyer. Or, the client can choose cancelable cover or non-cancelable coverage, or a hybrid of both. The policy can be priced on sales, coverage or AR. Premium payment options can be negotiated. Favorable endorsements such as a No Claims Bonus can be added. The goal, however, is always to create a policy that will be a valuable investment, ideally paying for itself in increased sales, an augmented borrowing base or reduced resources spent by the credit and collections team.
Trade Credit Specialty is a strong client advocate. This advocacy includes negotiating a favorable policy structure, comprehensive coverage, along with favorable tailored policy language. Typically, the offers presented to the client are not the first offers but offers that have been negotiated. With a thorough presentation created, the final offers are presented to the client along with information regarding the carrier’s rating, policy contract language, their ease of claim processing, online tools, and administrative requirements. The result is a successful pairing, often the beginning of a long lasting, mutually beneficial relationship between carrier and policyholder.
While the policy is in force, Trade Credit Specialty strives to make certain full value is gained from the policy. Once the policy is bound, clients can expect:
A thorough page-by-page policy review
Training for any online tools offered by the carrier
Useful forms and links are available on demand on the website’s “The Relationships” page
Monthly reminders of policy compliance requirements
Negotiating named buyer limits and any other needed endorsements
Claims guidance and advocacy
Help with securing sensitive financial documents from buyers and prospects (NDA is housed on The Relationship page of the website)
Finally, rest assured that the policy is not considered passive income. Renewal is the time to assess the effectiveness of the policy. Modifications to the policy can be negotiated, ensuring another year of successful support of the client’s credit function. If warranted, the program will be re-marketed to ensure that the renewal policy is competitively priced with the maximum level of coverage approved.