Credit Insurance – Definition & Meaning
Credit Insurance is a risk management tool that reimburses policyholders when their business clients fails to pay for the goods and services they had sold to them. The need for the credit insurance has increased because of the increasing domestic & international trade. It helps the insurer to extend their credit easily without higher risk as this plan assures payment.
Credit insurance companies control their exposures through limit management as they provide cover for 60-120 days. Credit insurance policies have covered commercial risks with the experience of last years.
Credit insurance protects a seller from the risk of the buyer non payment, which may occur due to insolvency, extended late payment, failure to pay within a fixed days of the due date and from an export contract or project due to government’s actions, which includes intervention to prevent the transfer of payment, cancellation of license, war or the change in the government’s laws or other measures.
The credit insurance gets the right of collection directly from buyer who failed to pay to seller. The credit insurer pays the amount of trade credit to seller if buyer fails to pay to the seller.
Benefits of Credit Insurance:
- It Protects account receivables.
- Expansion of sales to existing & new customers without increasing risk.
- Enhanced credit risk management
- It gives better borrowing and financing option.
- Your invoice will be paid in the case of customer default.
Reinsurance plays a very important role in the credit insurance to transfer the risk. When credit insurers faced the default, Reinsurance helps to flatten the loss impact.
In India, Export Credit and Guarantee Corporation of India (ECGC) is providing cover for credit insurance.