Using trade credit insurance – an insurance policy taken out on extensions of credit to customers – can help to protect companies from any risks. But how exactly does all of it work? No matter the insurance policy, whether it’s for a car, a house, or a business, they can sometimes be confusing about what exactly gets covered. We’re going to break down how trade credit insurance works for you.
HOW TRADE CREDIT INSURANCE WORKS
There are a few different elements that go into how trade credit insurance works. Instead of simply opening up a policy and speaking with the insurance company when the need arises, trade credit insurance companies tend to have a more dynamic relationship with their customers.
PARTNER IN CREDIT WORTHINESS
Trade credit insurance companies tend to become more have a partner in your daily credit monitoring activities than simply referring to them when a customer stops paying. Credit insurers are proactive in your business to try and eliminate the issues before they arise. They do this by gathering as much information about your customers and potential customers as possible through public records, credit history, financial statements and even meeting with them. Throughout the year, the credit insurer will keep an eye on the customer and investigate further when you request coverage for a specific buyer. By doing this, they become an extension of your credit management efforts.
LIMIT UNDERWRITERS
Limit underwriters tend to work with the larger, more significant accounts of the policyholder. They will review each individually and give their suggested credit limit. Each account will be given its own individual policy coverage – or the total amount the trade credit insurer is willing to pay should an issue arise. This is where their partnership comes into play. All the research done on the customer or potential customer is used to evaluate policy coverage.
DISCRETIONARY UNDERWRITERS
Discretionary underwriters look at all the less significant customers in a company and give one blanket policy. A credit limit is set for all of these accounts and will pay a predetermined amount should an issue arise on an account. This puts the onus on the policyholder to ensure they are tracking each of their account’s credit and payment behavior to try and discover an issue before nonpayment occurs.
FILING A CLAIM
Although each policy and insurer will have different parameters for filing a claim, usually they follow a similar path. If a policyholder discovers that a customer is unable to pay and the situation is unforeseeable, they will file a claim with their trade credit insurance company, along with any supporting documents. The insurer will then pay the determined amount to the policyholder usually within 60 days. This is also true in the case of a customer who may become the victim of fraud. If a customer has filed a dispute, however, the insurance company usually will not cover the nonpayment until the dispute has been resolved.
