A Few Comments About Credit Insurance
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:

• Domestic and foreign accounts;

• Foreign accounts only;

• Only certain customers over a specific dollar exposure

• Specific key customers only.

A credit insurance policy is designed to protect a company's accounts receivable catastrophic credit losses. Annual premiums can be raised or lowered by changing the annual deductible and/or the per loss deductible or co-payment. Premiums are also based on:

• The applicant company's past credit loss experience

• The creditworthiness of its customers

• The total dollar amount of coverage requested

• The size of the annual deductible

• The per-loss dollar deductible

• The excluded loss threshold

• The number of active accounts covered, as well as the accounts either excluded or partially excluded.

• The size of the discretionary credit approval limit

The advantages of purchasing credit insurance include:

• Protecting the company's receivables.

• Gaining the benefit of the insurance company's expertise in monitoring risk.

• The ability to offer competitive payment terms to customers.

• The possibility that having credit insurance will allow the creditor company to borrow more easily when using its accounts receivable as collateral.

Some of the problems associated with credit insurance include:

• The fact that the carrier will refuse coverage to certain customers, and that other customers will not qualify for the dollar amount of amount of coverage requested.

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

• Generally, a debt must be undisputed to qualify for coverage under the insurance policy.

Some points to consider:

• Always read the fine print

• Be aware that some policies allow for coverage to be cancelled at any time

• Often, insuring only specific accounts is prohibitively expensive