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The Advantages And Disadvantages Of Purchasing Commercial Credit Risk Insurance

1254 words - 6 pages

The Advantages and Disadvantages of Purchasing Commercial Credit Risk Insurance

One of the few tangible assets on the International Manufacturing Company Balance Sheet that is not insured is Accounts Receivable. One method of securing Receivables is by domestic and international credit insurance. A credit insurance policy is designed to protect a company's Accounts Receivable from catastrophic credit losses. Credit insurance may offer a variety of options to International Manufacturing Company, including insurance for:
 Domestic and foreign accounts.
 Foreign accounts only.
 Only certain customers over a specific dollar exposure.
 Specific key customers only.
Purchasing ...view middle of the document...

Any type of company can apply for Accounts Receivable insurance, including manufacturers, distributors, dealers, etc. International Manufacturing Company’s customers don't need to be huge corporations; any buyers can be considered as long as they are credit worthy, as determined by financial information, trade references, or in some cases simply our own experience with the customer.
The cost of credit insurance varies and is based on a number of factors including:
 International Manufacturing Company’s past credit loss experience.
 The credit worthiness of its customers.
 The total dollar amount of coverage requested.
 The size of the annual deductible.
 The per-loss dollar deductible.
 The excluded loss threshold.
 The number of active accounts covered, as well as the accounts either excluded or partially excluded.
 The size of the discretionary credit approval limit.
 Location of the buyers (domestic or overseas).
 As a "ballpark" estimate, the typical annual premium is approximately .5% - 2% of the total coverage requested, or .1% - .2% of the estimated covered annual sales.
In summary, rates may be calculated as a function of shipment volume, buyer credit limits, or outstanding receivables. Premiums are payable monthly, quarterly, or annually.
Many policies are structured with a one-time annual aggregate deductible. After the deductible is used up, it is not applied to any future claims. Co-insurance is often suggested as a way to reduce premium costs but in the end it all depends upon the needs of the insured.
Most policies are for one year but two-year policies are also available. Two-year policies have the advantage of keeping the premium rates the same during the two-year period.
For claims based upon a formal bankruptcy, the settlement period is between 30-45 days. For claims based upon a payment default, settlement is between 60-90 days for domestic claims and 90-120 days on overseas claims.
All the credit insurance carriers have an online system in which International Manufacturing Company can request to add new customers, increase or decrease present coverage, or cancel coverage on a particular customer.
Advantages and Disadvantages:
The advantages of purchasing credit insurance include:
 Increase Profits: Grow sales by making it more economical for our customers to purchase larger quantities. Shipping larger orders may help negotiate better pricing from suppliers, make longer manufacturing runs, and transfer inventory carrying costs.
 Penetrate Target Markets: Open new markets which International Manufacturing Company might otherwise perceive as too risky for extending credit terms. The opportunity to establish market share in emerging industries such as green industries have never been greater than right now.
 Get more from Distributors: Negotiate stronger representation by offering competitive terms to distributors. Provide incentives to keep more of NWP products in the supply...

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