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Credit insurance: definition
Credit insurance is a business risk management tool designed to protect the insured (seller) against the economic consequences of payment defaults by one or more customers (buyers).
The insurer compensates the creditor company when its customer is unable to meet its payment obligations due to internal failure (proven insolvency, bankruptcy) or external commercial or political events.
Credit insurance: how it works?
It is an insurance contract between the creditor (manufacturer, retailer, or service provider) and an insurer.
In exchange for the payment of a premium, the creditor transfers all or part of the risk of non-payment by the counterparty (customer, buyer, etc.) to the insurer. The insurer, on its part, undertakes to cover this risk by reimbursing a predefined amount of unpaid debts.
This mechanism secures the cash flow of the creditor (manufacturer, etc.), prevents the domino effect of defaults, and facilitates access to bank credit. It is particularly used by exporting companies exposed to political, economic, and commercial risks in third countries.
Credit insurance is particularly suitable for covering:
- delays or defaults in payment by the counterparty (the customer, the buyer),
- bad debts due to customer insolvency,
- exchange rate fluctuations,
- supply chain disruptions,
- natural and climatic disasters,
- political events, acts of terrorism, armed conflicts, expropriations, acts of confiscation, or nationalization measures,
- regulatory and tax reforms.
Credit insurance has two distinct components:
- Internal credit insurance which covers the domestic market
- Export credit insurance which covers international trade
In both cases, suppliers can choose to insure their entire customer portfolio or target only strategic accounts.
This tool is an essential lever for competitiveness and internationalization, particularly for small and medium-sized enterprises with limited financial safety margins.
The credit insurance contract
The credit insurer provides standard policies as well as formulas tailored to the specific needs of the policyholder.
Concluded for a fixed term, the contract specifies, in particular, the nature of the insured transactions, the value of the credits, their maximum duration, the risks covered, the amounts guaranteed (total, partial, or exceptional losses coverage), and the services included (collection of unpaid debts, access to information on customer solvency).
Credit insurance premium
The cost of credit insurance varies depending on the risk profile of the company and its customers. The premium is calculated based on the deductible amount and information gathered about the insured's customer(s), namely:
- turnover,
- geographical area,
- nature of the business,
- size of the company,
- history of losses resulting from customer defaults, etc.
The credit insurance premium rate is generally set between 0.1% and 2% of the amount of insurable receivables. The insured party is responsible for an excess of between 10% and 30% of the amount of unpaid receivables. Compensation rate is therefore set between 70% and 90% of the amount receivable.
For very small businesses (VSEs), the premium is usually set at a flat rate with a view to simplifying access to this type of coverage for policyholders.
The role of credit insurance
Credit insurance does not automatically cover all risks, assessing them using specific analysis tools. The insurer's assessment focuses mainly on the creditworthiness of the counterparty (the customer). The insurer can either accept the risk and set a coverage limit or refuse coverage.
If the risk is underwritten, the insurer continuously monitors the insured's situation throughout the term of the contract. It may intervene to adjust its commitments without affecting the validity of the contractual obligations.
Beyond compensation, credit insurance plays a strategic role through:
- monitoring the solvency of buyers,
- preserving the seller's cash flow,
- supporting trade. Without insurance, transactions would only be made in cash,
- developing business with emerging markets,
- preventing bankruptcies,
- monitoring customers to protect business activities,
- securing supply chains whereby the failure of a supplier or customer can cause a series of disruptions,
- monitoring customer ratings,
- collecting unpaid debts.
By pooling risks and compensating companies that are victims of unpaid debts, credit insurance helps maintain a high level of confidence in commercial relationships. This stabilizing function, which is particularly useful in times of economic crisis, makes the credit sector an indirect lever for economic growth and resilience in the productive fabric.
Credit insurance coverage options
Most credit insurance solutions are available in four schemes:
- Overall turnover coverage: this is a form of protection against the default of all the company's customers, that is full coverage of the customer portfolio, whether domestic and/or international.
- Key account coverage: this is limited to selective coverage whereby only a certain number of major customers are covered.
- Single buyer coverage: specific insurance against non-payment by a single dominant business partner. This solution is designed for companies whose business is heavily dependent on a single customer.
- Transactional coverage: this form of coverage is limited to protection on a transaction-by-transaction basis.
