CH15 - Credit Insurance

Question 1

What is Credit Insurance?

Answer 1

• Design exclusively to protect trade receivables.
• It protects a company against risk of not being paid by its customers after a sale
• The company buys a credit insurance policy from an insurer
• The insurance policy pays a certain percentage of real losses incurred after a buyer fails to pay an invoice within the terms that had been agreed upon.

Question 2

Coverage types: 1. Ground-up Coverage

Answer 2

• Coverage begins to take effect as soon as losses start to occur, in excess of a small deductible retained by the insured party.
• Such policies provide an efficient protection against the frequency risk (many small/medium defaults) and the severity risk (default of one large client)

Question 3

Coverage types: 2. Stop-loss Coverage

Answer 3

• For larger businesses
• E.g. a policy is structured with a large deductible of $50m, and covers aggregate losses up to $200m. The policyholder receives up to $200m of indemnity, once its own accumulated losses during the policy period reach the deductible amount of $50m

Question 4

Coverage types: 3. Credit limits

Answer 4

• Policies will cover losses in the aggregate based on a pool of receivables (buyers). Due to the dynamic nature of business, and the pool of buyers will change, policyholders are given some discretion to file claims against the policy for new buyers, or for receivables on existing buyers in excess of the amount reported at an earlier time.
• Claims are filed under a discretionary limit, which allows policyholders to file a claim without explicit review