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What is credit insurance?
Credit insurance is protection against the risk of loss due to bad debt i.e. non-payment. A debtor's book is often a company's most valuable asset, yet it is often uninsured. Most companies will insure their vehicles, yet the loss of a car will not place the business at risk or affect profitability. The default of a major debtor, by contrast, could lead to material loss or insolvency.
Which debtors are typically covered?
A distinction must be made between Trade Credit which relates to business-to-business debtors (terms typically 7-90 days) and Consumer Credit i.e. lending to individuals (terms up to 60 months). Credit Insurance pertains to Trade credit only. Also excluded are government entities and subsidiaries of the insured.
What is domestic credit insurance?
Domestic credit insurance covers debtors registered in SA and usually includes most SADC countries. Insurance is also available for export sales, but this is secured by a separate policy.
Which bad debts are insured?
All policies cover non-payment by a debtor as a result of liquidation or once a default judgment has been obtained in favour of the insured. Also, certain policies will include 'protracted default' which pays out once a debtor is more than 6 months past due date.
Does this product cover business rescue?
Yes it does cover business rescue in terms of the new companies act and amendment bill, Act No. 71 of 2008, chapter 6.
How big must my debtors' book be in order to insure it?
The policy will probably not be cost-effective if your debtors' book is less then R 10 million outstanding per month.
Can I insure a single debtor?
One cannot insure a single debtor unless it is of substantial value, say R30 million outstanding per month. Such cover might also be relatively expensive, assuming you are able to secure it.
Can I select the debtors which I want to insure?
Yes. You can, for instance, only insure listed or non listed companies, or only your top ten debtors.
Can I insure for liquidation only?
Yes you can.
What about my credit limits?
The insurer reviews existing and subsequent new credit limits to assess risk, and on an individual basis either approves or declines each limit. Turnaround varies from 1-5 working days. The insurer may also allow the insured to mark credit limits up to an agreed Rand-value and still have these debtors covered by the policy. Any sales generated (after inception of the policy) subsequent to the approval of the credit limit will be insured.
What does it cost?
A perception exists that credit insurance is costly. This is not so. Premiums vary based on the industry, bad debt history, the size of the debtor's book and its perceived risk. Structured policy premium rates can be as low as 0.1% - 0.5% of turnover.
What are the other advantages?
Credit insurance can allow a company to enter markets previously considered too risky. Also, a company may be in a position to increase sales to an existing customer where credit limits are approved at higher values than those assessed by management.
Can I select my level of insurance?
You can – by applying a threshold per debtor or an Annual First Loss.
Can I pay quarterly?
You can pay monthly, quarterly or annually. If you pay annually in advance, you can negotiate a discount.
Can I have a number of policies in my group?
You can. However, you may not insure the same debtors' book with different underwriters at the same time.
What happens in the case of disputes?
The policies cover commercial risk and as a reslt, disputes and product defects are not covered.
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