TRADE CREDIT INSURANCE

BY
IFFCO TOKIO GENERAL INSURANCE CO. LTD.
What is Trade Credit Insurance
Trade credit insurance is an insurance policy and risk management
product that covers the loss due to the non-payment of valid debt by the
debtors as a result of protracted default, insolvency or bankruptcy. It is
purchased by business entities to covers a portfolio of buyers and the
insurance company pays an agreed % of receivable that are unpaid.
Benefits of Trade Credit Insurance
• Instrument to raise turnover
• Enables the insured to offer open credit terms to its customers rather
that advance payment or letter of credit payment terms
• The insured gets access professional credit risk expertise- better
credit control and collection services
• The insured has access to better credit terms from Banks as banker
may insist on trade credit insurance before providing financing .

This is Triangle of Credit Insurance (parties involved)

insured

Insured
Trade Credit Sell of good on
Insurance Contract Credit and receiving
Cover of Non- payment
Payment Risk

Insurer Customer of
Credit check & approving Insured/ Buyer
coverage on the customer to
the insured
What is covered under Trade Credit Insurance Key abstracts of Guidelines for Trade Credit Insurance issued by
A. Under Domestic and Export policies IRDAI on 10th March 2016
• Protracted default/ wilful default / delayed Payment by the customer • A trade credit policy can be sold to seller on whole credit turnover
• Insolvency of the customer basis only, covering all buyers. Selection of buyers is not allowed.
B. Under Export policies only However, if the seller prefers to take cover for a particular segment/
• Political Risk i.e. Non payment arising due to any act or decision by product/country, the same shall be allowed provided the cover is taken
the Government of the customer’s country for the whole credit turnover of all buyers of that particular segment/
What is NOT covered under Trade Credit Insurance product/ country
• Sale to subsidiary & associates • A trade credit insurance policy shall not be issued to banks/financiers
• Sales made against letters of credit or Bank Guarantee • No trade credit insurance policy shall cover factoring, reverse
• Sales against advance payments factoring, bill discounting or any other similar arrangement
• Sales to Govt entities & Sales to individuals • Assignment of proceeds of a claim under a trade credit policy may be
• Genuine trade disputes made to a bank
• Pre-shipment risk • A single specific trade credit policy covering only one shipment cannot
• Consequential losses & Interest on late payment be sold to a prospect
• Foreign exchange loss • A trade credit policy shall not grant an indemnity of more than 85% of
• Loss in excess of Credit Limits the trade receivables from each buyer
Key terms used in Trade Credit Insurance
• Insured: The policyholder who sales goods or service on credit
• Buyers: The customers of the insured
• Estimated Turnover: Credit policy is started based on the forecasted
credit sales turnover for the next 1 year. which is called the estimated
turnover. This should exclude sales to subsidiaries, associates, sales
against LC , BG and advance payment, sales to Govt entities and
individuals.
• Insured % (Indemnity): 85% of the loss amount.
• Premium rate: This is the policy rate
• Annual Premium (AP): Estimated Turnover x Premium rate
• Minimum Premium (MP): Normally it is 80% of the Annual
Premium. This is the committed premium at the start of the policy.
Please note that no refund in case turnover is not achieved.
• Maximum Limit of Liability (MLL): MLL represents the
maximum sum total of claims that can be paid in a single policy
period. Standard MLL = 40x MP; 50 / 60 times MP also available at
higher premium rates
• Threshold (Non-Qualifying Limit): Any single loss below the NQL
will not be admitted as claim. Standard NQL is INR 2.5lacs
• Maximum Credit Period (MCP): This is the maximum credit terms
that the insured can offer to its buyers. The insured may choose to
offer lesser credit terms internally but in case the invoice is not
cleared by the MCP, a claim needs to be lodged. Standard MCP is
120 days for Domestic sales and 180 days for Export
• Maximum Notification Period (MNP): This is the maximum period
within which a claim needs to be intimated to the insurer. Standard
MNP = MCP + 30 days
• Claim Waiting Period : This is the period from claim notification to
claim payment. Within this period the insurer will make all efforts to
recover the default on behalf of the insured. Standard period is
150days in case of protracted default & 30days in case of insolvency
• Credit Limit: The maximum exposure allowed on a particular buyer.
The limit on each buyer needs to be requested by the insured and
approved by the insurer. This policy works on pre approved limit
basis, i.e. limit on a buyer needs be approved before invoicing.
• Discretionary Credit Limit (DCL): In case the number of buyers is
large, the insurer may delegate part of limit approving authority to
the insured. The insured need not come to the insurer for approval
upto DCL
Basis of Pricing of Trade Credit Insurance policy Steps before inception of Trade Credit Insurance policy

• Estimated turnover • Business activity The prospect submits the completely filled proposal form

• Credit worthiness of buyers • Exporting countries

• Payment terms • Sector ITGI issues the Non Binding Indication terms (i.e. commercial terms)

• Current AR ageing • Past bad debt history

How is Premium calculation- Just an example
The prospect needs to accept the terms (by signing and stamping on the
• Estimated Turnover: : INR 1,000,000,000 same). There is no legal obligation to pay premium at this stage
• Premium rate : 0.25%
• Annual Premium (AP): INR 2,500,000
• Minimum Premium (MP): INR 2,000,000 (AP x 80%) ITGI will conduct a formal limit underwriting of the top 10 buyers
initially (other buyers to be done after inception of policy). Please be
• Maximum Limit of Liability (MLL): INR 80,000,000 (MP x 40) prepared to share with us financials / trading experience with unlisted
entities
• Other Charges:
–Limit monitoring fee:
INR 3300 p.a. per buyer. ITGI will present the results of the buyer underwriting study to the
This is charged for buyer prospect in about 2 weeks. The average acceptance rate of ~ 65% is
considered good.
evaluation and routine monitoring.
–Claim intervention fee:
INR 5000 per notification . If the prospect accepts the limits for the top 10 buyers, it pays the first
installment of the minimum premium and starts the policy
 Claim filing documents
• Duly signed & stamped “Notification of Overdue Account” form
• Purchase Order
• Clear & legible Invoice copies
• Proof of Delivery
• Statement of account
• Copy of Communication with the debtor following up for payment
• Balance confirmation (if any)
• Sales Contract (if any)
• Debit / Credit Note copies (if any)
• Any other document as specified by the insurers
Important time lines under Trade Credit Insurance policy
Note: All timelines start from Invoice date
When can a claim be rejected
• Invoices not within the policy period
• Late notification – Claim needs be notified within MNP
• Invoices raised after credit limit is cancelled on a buyer.
• Total outstanding invoices is less than threshold
• Adverse information – if the insured knows that the buyer is having
financial problems or dishonors cheques but the insured still
continues to sell
• Do not trade with the same buyer on both LC and open account
terms. Each buyer to have unique single trade mechanism.