November 1, 2022

Trade Credit Insurance

Trade Credit Insurance

Trade is essential to a country’s economic progress. India has relied on an export-oriented trade strategy for many years. Its overall exports in December 2021 were estimated to be $57.87 billion– a steady growth over the year before.

However, as with any other business activity, trade also comes with its own set of risks- primarily, the risk of defaulting creditors and non-payment to sellers. Creditor insolvency can lead to unexpected losses for exporters, hindering their development and affecting the industry’s growth.

To combat these risks, traders and financial institutions opt for Trade Credit Insurance, which acts as a trade guarantee for these stakeholders, giving them much needed financial assurance.

Trade Credit Insurance, also known as Credit Insurance, indemnifies the insured for any loss directly caused by the failure of the buyer to pay all or part of the invoice value of shipments received within the policy period.

Here, only those shipments are covered that are shipped within the policy period and in conformity with the applicable export laws and regulations of the insured’s country and the import laws and regulations of the buyer’s country.

Trade Credit Insurance works by covering a business’s portfolio of buyers for late or non-payment of agreed value due to insolvency, bankruptcy or protracted default. Pay-out under this policy is made at a pre-arranged percentage of the invoice that remains unpaid.

This policy protects trading businesses from the following risks  :

  • Insolvency - where the buyer has declared bankruptcy and is subject to insolvency proceedings
  • Protracted Default - where the buyer is unable to pay the due amount within the waiting period, provided that such failure is not due to insolvency, a political event or a natural disaster
  • Political Risks - this is applicable for buyers located outside of India, where failure of payment is due to political instability or unrest in the buyer’s country. These risks include Moratorium, Transfer restriction / Inconvertibility, War, Import/ Export restriction, Natural disaster, or Licence cancellation
  • Rejection of delivery - where the buyer refuses to pay for a delivered consignment or refuses to accept delivery of exclusively manufactured goods after they have been shipped
  • Failure of Bank - this policy also covers non-receipt of trade credit payment on account of failure of the buyer’s bank

Trade Credit Insurance covers only those credit risks that have a direct link with an underlying trade transaction. Without this link, the outstanding amount becomes uninsurable. Furthermore, this policy will not provide coverage for the following :

  • Wrongful/dishonest acts or omissions of the insured business
  • Amount owed by a public department, institution, or organisation, which cannot be declared insolvent
  • Sales contract made with private individuals
  • Any material breach of or inaccuracy regarding any agreement made by the insured business
  • Any penalties or damages that the buyer is entitled to pay
  • Cost incurred in resolving disputes between the insured and the buyer
  • Any interest accruing after the original due date of payment
  • Insolvency or financial default of any party except the buyer
  • Losses arising out of nuclear risks
  • Instances of war specifically between the People's Republic of China, France, the United Kingdom, the states of the former Soviet Union, and/or the United States of America

Trade Credit Insurance is a crucial risk management tool for an economy's traders. Its importance is further highlighted in the emergence of credit guaranteeing establishments, such as the Export Credit Guarantee Corporation (ECGC) of India. These strengthen the provision of Trade Credit Insurance for all of India’s exporters and ensure secure international trade.

Learn more about how you can protect your shipments through Marine Cargo Insurance

Opinions, conclusions and statements of intent expressed in this article are that of the author and Verak does not accept liability for the views expressed unless confirmed by an authorized representative of the Company independently of this communication.