Credit Insurance- A Risk Management Tool
NEED FOR CREDIT INSURANCE
The need and importance of credit insurance is great. It provides assistance in the form of enhanced bank financing by improved margining ratios on accounts receivable. Thus it raises the borrowing capacity of the policy holder. It can be an instrument for generation of quick cash flows to tide a over a tight situation arising out of bad and irrecoverable debts. It is time-tested policy of many a company to extensively use credit insurance to frame sales drives aimed at expansion which entail huge credit risks and such risks can be substantially minimized by way of credit insurance. It is generally found that all the leading commercial organization build up a professional team of credit management which expertly guide the management in this regard.
Credit insurance is subscribed by the companies to protect themselves against specific losses that can endanger their very existence and instability in the operation. Conceptually it is just like any other form of insurance. The areas in which this instrument could be more prudently and effectively employed are the cases of insolvency where a supplier company protects itself against the buyer or the debtor turning insolvent or irregularity in payments in the form of protracted defaults or in the case of export sales in which an exporter always runs the risk of cancellation of the buyer's contract.
ISSUES BEFORE TAKING A CREDIT POLICY
The most important issue before a company is to determine the subject matter of the insurance and the cost of such insurance. There are no predetermined price for credit insurance policies as there are several which go into the determination of the premium. The insurance company would always consider the turnover level, bad debt history, risk levels of customers and the countries etc. Generally it is found especially in the case of exports there exists a list of dubious destinations which is known as caution list readily available with the Reserve Bank of India and policies covering export to these countries carry a higher premium.
Premium may be payable in a one-off non-returnable lump sum at the very outset with an end of the year adjustment or no adjustment at the end of the year. Normally premium is calculated at a rate against turnover and payments may be made in instalments and at the end of the year based on the declaration additional premium may have to be paid when it is excess of the original estimate. There might be a provision for rebate when it falls short of the ceiling.
The insurance companies monitor their clients base and any adverse information such as overdue accounts or defaults in payment is quickly flashed on their radar.
In recent years there have been significant developments in the sphere of credit insurance in the form of emergence of the underwriter who act as intermediaries and charge commission for their services. As a result of this underwriting activity the companies can reap the benefits of expert service of the underwriters who offer broad spectrum of options and tailor-made insurance products in credit insurance.
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