Credit Insurance and Risk Management
By Michael C. Dennis, MBA, CBF

Accounts receivable is often the only tangible asset on the balance sheet that is not insured. Credit insurance offers a variety of options to creditors, including insurance for:

A credit insurance policy is designed to protect a company's accounts receivable from the effects of catastrophic credit losses, including:

• Insolvency

• Contract cancellation

• Bankruptcy

• Default by a buyer (for almost any reason)

Annual premiums can be raised or lowered by changing the annual deductible and the per loss deductible or co-payment.
Premiums are based on a variety of factors including:

• The applicant company's past credit loss experience

• The creditworthiness of the applicant's customers

• The amount of coverage requested

• The size of the annual deductible

• The per-loss dollar deductible

• The number of active accounts covered

• The number of accounts excluded

• Any discretionary automatic credit approval limit

Typically, premiums are less than 1% of the annual sales covered. There is normally an annual deductible, an annual cap on bad-debt losses, as well as a per loss deductible. Creditors must still perform credit analysis on new and existing customers, and collect from delinquent accounts.

The advantages of purchasing credit insurance include:

• Protecting the company's receivables under a single credit insurance contract.

• Gaining the benefits of the insurance company's expertise and experience in your market.

• The assurance of payment not only provides peace of mind, but can also strengthen a company's balance sheet from the viewpoint of lenders, investors and stockholders.

• The ability to offer competitive payment terms to customers.

• The possibility that having credit insurance will increase the formula used to calculate the borrowing base.

• The possibility that the bad debt reserve can be "drained."

Some of the disadvantages of credit insurance include:

• The annual premium.

• The annual deductible and per loss deductibles.

• The fact that coverage will be denied to certain customers.

• The fact that other customers will not qualify for the amount of amount of coverage requested.

• The fact that insurance policies include an exclusion for losses below a certain dollar amount.

• The fact that generally speaking the debt must be undisputed to qualify for coverage under the insurance policy.