| HOW
TO BUY CREDIT RISK INSURANCE - (Continued - 3 of 4) |
|
Designing a Program to Fit Your Needs
Once
you have given careful thought to where credit insurance fits
into your business, and you have your specialist ready to
help you, before marching off to underwriters with an application,
it is best to work with your broker to map out how you want
the policy to look.
Your
broker can assist you in understanding the underwriter's perspective
so that together, you can design a policy that meets your
needs and represents a fair opportunity for the carrier as
well. First, we'll examine a few basic policy parameters,
then look at some more detailed items you'll want to consider
prior to submitting an application.
Premium.
Always the first item of interest, the policy premium is a
logical first parameter to examine. Because the policies are
custom tailored and there are numerous factors that affect
the premium, providing you with estimates in an article of
this nature would be misleading. Suffice it to say, for a
small fraction of a percent of covered annual sales, an amount
easily recaptured through any of the proactive benefits of
the policy, you can insure your portfolio or any meaningful
segment of it. The ultimate premium that the carrier charges
will be priced based on a number of factors including: default
rates in your industry, your loss history, customer credit
quality, the spread of risk and the deductible and coinsurance
levels in the policy.
Risk
retention: These come most commonly, in the form of deductibles
and coinsurance. Carriers use either or both to allow for
risk sharing. This risk retention assures them you have a
vested interest in continuing to manage your exposure, while
also allowing you to minimize your premium. Deductibles are
typically a one-time per annum first loss position you have
to satisfy before claims payments start. Coinsurance is a
percentage of the loss that you retain on each account, and
typically ranges between 10% and 20%.
One general
rule in designing your policy is to use a coinsurance level
less than or equal to your gross margin. This allows you to
be sure you are covering your cost while avoiding paying additional
premium to insure your profit. A deductible can be used to
lever down the premium to a certain point. You can maintain
a small reserve to cover the deductible or take it out of
your cash flow at the time of the first loss.
Coverage
limits: Your underwriter will review and approve specific
coverage limits on the customers you wish to insure. While
you can always request limit increases or submit new accounts
as often as you need to throughout the policy term, you will
need to start off with that initial list of accounts you want
to insure at the present time. In selecting the accounts,
it is important to not try to guess which accounts should
be insured and which do not pose any default risk. The policy
is designed to protect against unexpected losses and as such,
you should only be looking at the size of the exposure, not
the perceived credit quality of the account. It is often the
accounts that appear "good as gold" that carry the largest
balances and can hurt you the most if an unexpected default
occurs. Additionally, you want to provide the underwriters
with a balanced spread of risk that will allow them to give
you their best pricing and terms.
With
these three key items addressed, your specialist broker may
recommend additional coverage endorsements based on the nature
of your business. These should be discussed and itemized in
the quotes that you receive. You will also want to clarify
items like your maximum terms of sale, lead times in filling
customer orders and note any specially purchased materials
or custom work that might require additional coverage.
Once
you and your broker have a better picture of how the policy
will look, it is simply a matter of completing the application.
Your broker will submit it to the appropriate markets for
you.
The
Application Process
Your credit insurance policy will be quoted
based on the information you provide in your application,
and that application will be bound into the policy as your
underlying representations in the agreement between you and
your insurer. Accordingly, it is important that you provide
as complete an application form as possible. In most cases,
the form is no more than 4 pages of basic questions about
the business, along with tables for listing the coverage limits
you want and reporting significant past due accounts.
For the typical domestic credit insurance
application, carriers can provide full quotes with account
underwriting decisions in about two weeks. This varies depending
on the number of accounts and underwriting backlogs. Your
broker should follow-up on your behalf to make sure that the
quotes are returned in a reasonable timeframe. Applications
for export coverages can take longer due to the longer lead
times in underwriting overseas accounts.
In terms of selecting carriers to solicit
for quotes, it is important to understand that there are only
a small handful of carriers who specialize in this type of
coverage, so in some cases you may only have one or two viable
options to consider. As mentioned earlier, to avoid confusion
and delays you should select one broker to work with, as they
should be able to provide you with access to the few carriers
who might be a fit for your needs. Do not hesitate to ask
your broker about the carriers they recommend for you.
When
the underwriting process is complete, you should receive the
quotes as presented to your broker by the carriers. It is
then time to evaluate the offers and determine who represents
the best fit for your specific requirements.
The next
page offers help on:
Evaluating
Offers
|
