How to buy Credit Risk Insurance
Credit risk insurance is rapidly becoming a preferred financial tool for companies facing a wide range of problems and opportunities. In this article, we'll explore how credit risk insurance can be of value in your business and outline the best approach to shopping for this unique and highly valuable coverage.
This article is broken down into 6 key sections, with the intent of helping you understand the process of determining your credit risk insurance needs and then how to buy it.
Determine Why You Want to Buy Credit Risk Insurance - summary of benefits of credit risk insurance
Locate the Right Credit Risk Specialist to Assist You - why this is important, what to look for
Designing a Credit Insurance Program to Fit Your Needs - budget considerations, risk retention, establishing coverage limits
The Application Process - what to expect, turn around time, selecting carriers to solicit
Evaluating Credit Insurance Offers - apples and oranges, how your specialist can help, key points to compare for credit risk insurance
Implementing and Managing the Program - getting started, ongoing management items, how your credit risk specialist can assist
Evaluating Credit Risk Insurance Offers
Unfortunately, because each carrier has their own risk appetites, underwriting philosophies and contract wording, an "apples-to-apples" comparison is not likely. Your broker should be able to help you understand the offers provided by each carrier and highlight key differences.
While the coverage is fundamentally similar, the carriers all differ widely in how they structure and administrate their policies. So, after covering the basics of premium, risk retention and coverage limits, you will want to take the time to understand how each carrier differs on some of the areas where the policy has to be customized to fit your needs (special terms of sale, export sales in different currencies, work in process coverage on custom goods, etc.)
From your perspective as a buyer of credit insurance, you want to evaluate the carriers and their offers based on three key categories- the carrier's financial strength, their contract wording and the policy terms and coverages they propose.
You will find that virtually all of the carriers specializing in this type of coverage are either monoline insurers specializing exclusively in credit insurance, or are niche operations in very large, multinational property and casualty companies. AM Best, S&P and/or Moody's ratings are readily available. The top providers are highly rated, investment grade companies. Financials are publicly available for your review as well. Your broker can assist you with in securing this information.
Contract wording is where you will find the major differences between the carriers. Your broker can provide specimen policies and wording for any key endorsements for your review. Among the things you will want to understand are how they define insolvency, what the claim filing deadlines and requirements are, what reporting requirements are part of the program, what their cancellation provisions are, how they treat collections on past due claims and how recoveries are shared. All of these items vary widely in some cases, so understanding how one carrier operates does not necessarily mean that you can expect the same from a different set of underwriters.
The quotes, if you receive more than one offer, will have some fundamental similarities, but you should take the time to go over these differences with your broker. Comparing premiums and deductibles and/or coinsurance has to be done in light of what the carriers are offering on coverage limits and policy conditions. Credit insurance is not a commodity product that can be shopped on price alone. The goal is to find the program that best matches you needs based on how you want to put the policy to work. As custom tailored programs, you should expect that some fine tuning of the initial quotes may be necessary to bring the policy offers in line with your requirements.