Credit Insurance: Coverage, Claims and Exclusions

Updated: 03-11-2023 10:52:51 AM

Businesses and companies of all sizes – small, medium or large – need some kind of safety net to manage the financial risks arising due to customer defaults. This can be done by taking a credit insurance that provides safety, security and peace of mind to grow and expand the business.

 

What is Credit Insurance?

A credit insurance is a type of business insurance designed to protect businesses from commercial and political risks that may impact the finances of the business. Such risks can be beyond the control of businesses or individuals.

However, safeguarding against risks like loss or damage to the business is important to expand the business. Many national and private insurance companies in India provide credit insurance. This helps business owners overcome the loss due to customer defaults and in turn, improve quality, increase business profits, and reduce risks of unpredictable customer insolvency. It also protects exporters against any loss incurred during export of goods and services.

Types of Credit Insurance

Here are the different types of credit insurance.

• Credit life insurance: Helps pay off the debts in case of the sudden death of the insured person
• Credit disability insurance:  If the insured faces permanent disability due to any reason, the insurer will pay off existing debts
• Credit involuntary unemployment insurance: It aids in paying some or all of existing debts if the insured is involuntarily unemployed
• Credit property insurance: It protects the insured’s collateral property subject to the theft, loss or damage
• Trade credit insurance: It provides indemnity for bad losses in case of debt receivables due to the failure of customer repayment

What all Credit Insurance Covers?

Credit insurance covers 2 types of risks – commercial and political risks.

Commercial Risks: 

• Insolvency of the buyer
• Non-payment by the buyer

Political Risks: 

• General moratorium on payment by the government of buyer’s country
• Cancellation of import license
• Political events, economic difficulties, legislative or administrative measures preventing payment
• Military or civil war, revolution, riot or insurrection
• Non-payment by government buyer
• Government decision preventing performance

How Credit Insurance Functions

Let us understand how credit insurance functions so that when needed, you can reap timely benefits.

• The biggest setback in the working of any business, be it small, medium or large, is financial loss that can happen due to various reasons
• There might be times when you have sold a product or a service to a client or group of clients and unfortunately and payment gets stuck
• If this amount turns out to be huge, it can even lead to shutting down of the business. A credit insurance helps in managing such situations by providing the amount that was not paid by the client
• This payment is done in a certain percentage and not 100% of it, as must be pre-specified in the policy document

Eligibility Criteria

Any company that has receivables on its balance sheet is prone to loss from the inability or failure of a customer to pay them. Such companies can get enrolled for credit insurance policy.

Credit Insurance Claim Process

Many national and private insurance companies in India provide credit insurance policy in India. However, the internal systems and processes may vary for different companies. Let’s go through some of the general guidelines related to the claims process or settlement in India:

• Immediately inform the insurance company about the business loss or damage covered under the policy document.
• This can be done through different channels like calling on their toll-free number, sending e-mail or contacting the nearest branch office of the insurance company
• Inform the policy issuing office about the loss or damage in the claim form and submit it for processing or settlement
• Any police report, if needed as per the case, must be submitted to the insurance company
• The process is followed by the insurance company checking all relevant documents like accounts, sales sheets, invoices, balance sheet, or any other document requested by the insurance executive
• If required, an arbitrator is appointed by the insurance company to calculate the value of loss or damage and suggest the sum assured and other benefits payable to the policyholder based on the individual credit insurance policy document
• Once all legal and internal processes are completed, a Final Report is submitted to the internal panel for the claim amount to be given to the policyholder
• Policyholder would have to submit his/her ID proofs, Policy Document, and Bank Details etc. for receiving the compensation arising out of the credit insurance claim
• Amount is transferred to the policyholder bank account based on the selected mode of payment by the insurance company

Documents Required for Claim Process

• Duly filled in and signed claim form
• FIR report
• Accounts books and reports for inspection by insurance company
• ID proofs
• Bank details of the policyholder
• Any other documents asked by the insurance company

Exclusions Under Credit Insurance 

Not all situations are covered by credit insurance, also called exclusions. Any problem to the business due to following reasons are not covered:

• Any nuclear risk or contamination due to a radioactive substance
• Customer disputes with the buyer that may result in withholding of partial or full payments by the buyer
• Any interest amount that gets accrued after the original due payment date
• Amount owed by any government entity which cannot be declared insolvent
• Currency fluctuations, Reverse Factoring Policies, pre-shipment risks

Companies Offering Credit Insurance in India

Following companies provide credit insurance in India:

• TATA AIG General Insurance Company Limited
• United India Insurance Company Limited
• The New India Assurance Company Limited
• HDFC Ergo General Insurance Company Limited
• ICICI Lombard General Insurance Company Limited
• IFFCO Tokio General Insurance Company Limited
• Bharti AXA General Insurance Company Limited
• SBI General Insurance Company Limited
• Bajaj Allianz General Insurance Company Limited
• Raheja QBE General Insurance Company Limited
• Export Credit Guarantee Corporation of India (ECGC – owned by Govt of India)

Important Aspects

• Credit Insurance policies are best-suited to companies which sell goods to their customer on an open-account basis either as a manufacturer or a distributor with customers in India or abroad
• One can buy a rider (additional benefits) to cover the risks arising due to errors done by an employee of the organisation
• The policyholder has an option to extend the timelines for payments awaited from the buyers under the specified maximum credit period in the credit insurance policy

Advantages of Buying Credit Insurance

Some of the benefits of purchasing a credit insurance are:

• It helps the businesses by protecting their account receivables or business sales that will be converted into cash soon, thereby, protecting the most important asset
• This type of credit insurance helps the businesses by providing an opportunity to the manufacturers and distributors whereby they can increase their sales to their existing customers and improve the cash pipeline with almost no risk on themselves
• It reduces risks of unforeseen customer insolvency or bankruptcy which could have created a cash crunch due to bad debts
• It also opens new avenues of business by adding new customers and supplying them with goods on credit basis, thereby, directly hitting the bottom-line for the success of any business
• Credit insurance helps businesses by improving the funding access at competitive rates and increasing the chance of getting finance from banks
• It helps policyholders to seek more information about customers and screen them regularly for a sound business environment
• It also keeps a proper balance if the credit insurance risk is originated by an employee of the organisation by covering them under a Rider option or a separate policy offered by the insurance companies providing credit coverage due to errors by employees

FAQs

Q1. What kind of currency-related risks are covered under credit insurance in India?

At times, political problems might create an issue in exchange of currency with countries you are doing business. Risks or losses arising due to such a situation are covered by credit insurance policies.

Q2. Does credit insurance help businesses in borrowing at lower rates?

Yes, credit insurance policy helps business by optimising bank financing options by providing insurance cover to the trade receivables.

Q3. How does this policy help business in improving its financial records or planning?

A credit insurance policy helps by ensuring that cash flow is maintained, profitability is increased, and budgets are protected. It also helps in improving credit decisions through informed decision-making by the policyholder.