Credit Insurance

What is it?

This is when a creditor insures their debts with a third party. Credit Insurance is intended primarily to cover commercial sales contracts, but may also be extended to include W-I-P (work in progress) where relevant. It protects domestic and/or export sales against non-payment caused by factors such as insolvency and default.

Why is it used?

Bad debt is unpredictable and potentially the most damaging type of loss a business can encounter. In the event of insolvency of a debtor, Credit Insurance can replace cash flow, hence providing a cushion against the bad debt. It should not be considered as an alternative to no-existent credit management. It is designed to support an existing system of credit management.

How does credit insurance work?

Whether you apply direct to the Insurance Company or through a broker, a number of influences will be considered when deciding the price and extent of coverage to the customer. Such influences are:

  • Trade Sector
  • Previous loss record
  • Standard of internal credit management (collections & credit information taken)
  • Markets sold to
  • Customer profile
  • Economic and political conditions of the market to be covered.

Once calculated, premium is usually charged at a % rate of either insurable turnover at a charge of 0.4 – 0.8% or average receivables. This is often payable in deposits during the policy year and adjusted at year end, or monthly in arrears against a declaration of turnover.

In the event of a bad debt and a claim being made against Credit Insurers the customers may have to bear a proportion of the loss – this is the minimum retention. The discretionary limit the insured can trade up to differs from case to case. In all cases business information is required.

The credit insurer will let them trade up to a certain amount (the discretionary limit), and to back up their decision under that limit they must take approved credit information . Over the discretionary limited they must refer the deal to the credit insurer.

As experts on the provision of Credit Insurance, we can advise you on how to organise such insurance.

For further information, contact Jim Stafford or Jonathan Foley of Friel Stafford, 44 Fitzwilliam Place, Dublin 2. Tel: 01 661 4066. Fax: 01 661 4145


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