Nothing is sold until it is paid. Accounts receivables are often considered as a big asset for any business, however, if your customers do not pay what they owe to you, credit losses can pose a serious threat to your business. Many times, in such situations, where credit has been extended, customers are simply unwilling or unable to make the payment due to various reasons like insolvency, bankruptcy, default, etc. In certain situations, circumstances may be beyond the either party’s control like war, riot, political unrest, etc.; and due to which, it may delay the payment or the transfer of payment.
In any case, the non-payment of trade debt would definitely affect the company’s finances, especially its working capital. Therefore, it makes complete sense to go with trade credit insurance.
This kind of insurance policy covers a wide range of risks associated with non-payment resulting from trade, both domestic and global.
In a move that can positively affect the availability of finances for trade, the Insurance Regulatory and Development Authority of India (IRDAI) has liberalisedthe norms for atrade credit insurance policy.
In the last few years, many remarkable changes have taken place in the economy, especially in micro, small and medium enterprises, which have increased the requirement for credit insurance. Therefore, in order to boost the credit insurance market, IRDAI has revisited the current guidelines which govern the credit insurance market in the country and made necessary amendments.
Revised Trade Credit Insurance Guidelines
IRDAI said that the insurer should assess the credit risk of any buyer who is contributing over 2% of the total turnover of the policyholder. Further, a trade credit insurance policy should not be issued to lenders, financiers, banks, etc. A trade credit insurance policy can only be issued to a seller on the whole credit turnover basis, which would cover all buyers.
However, if the seller insists on taking trade credit insurance cover for a particular segment/product/or country, the coverage can be offered, provided the cover is bought for the wholecredit turnover of all the buyers of that specified segment/ product or country. The cover under trade credit insurance would be offered only to pre-agreed buyers as per the limits specified. Any change in the limits would be effectiveonly if the policyholder has taken the pre-approval of the insurer.
Further, a trade credit insurance company should avoid granting an indemnity of over 85% of the trade receivables from each buyer. Earlier, this limit was 80% of trade receivables. Moreover, it is the responsibility of the policyholder to notify conflicting information about the buyer to the insurance company. A policyholder would not be compensated for buyer’s non-payment of trade receivable on account of adispute with the supplier of goods or services until the dispute is solved.
In the revised guidelines, IRDAI has also asked insurers to frame internal risk management guidelines to assess the trade credit risk of the buyerand buyer credit limit review. It is essential for insurers to construct suitable risk management models to include its various risk management strategies covering reporting and auditing systems, risk limits, etc. These risk management guidelines would be approved by the Board of Directors of the insurance company and would clearly specify the authority level for acceptance, rejection/partial and review of thecredit limit on the buyer.
How do New Trade Credit Insurance Guidelines Affect Your BusinessIJ
The new trade credit insurance guidelines can affect your business in various ways. For instance, in any case, the insurer will not give an indemnity of over 85% of the trade receivables from each buyer. Moreover, if you are dealing with a buyer who has a record of late payment or who might go bankrupt in a few months, it becomes necessary for you to inform any adverse information about the buyer to the insurance company.
In case you hide material information about the buyer, the trade credit insurance company has all rights to reject your claim. Further, in any case, if you have a buyer who is making a contribution of over 2% to your total turnover, the insurer can ask you to submit details about the buyer in order to assess his/her credit risk.
Conclusion
Overall, with its revised guidelines, the trade credit insurance policy has become more attractive, and as a result, it can be used by any business to trade confidently with less risk.