The Ins and Outs of Trade Credit Insurance

Surprisingly cheap, flexible and simple, it could be the easiest way for you to get a competitive edge.

Last in a five-part series. Click here to read part one, part two, part three and part four.

In this series, we have discussed how companies manage bad debt risk, why they need trade credit insurance, why they resist buying trade credit insurance, how trade credit insurance can pay for itself and what to look for when buying trade credit insurance.

In my final post of the series, I will explain how prices for trade credit insurance are set and what is covered with trade credit insurance. Then I will provide insights into future trends and give advice to companies considering trade credit insurance.

[Also by J. Paul Dittmann: 10 Steps to Mitigating Transportation Risk]

Screen Shot 2016-05-19 at 11.56.34 AMHow is the price for trade credit insurance set?

Pricing for trade credit insurance is surprisingly low and based on a number of variables, tempered by judgment of the underwriter. Those variables include:

  • The amount of sales being protected (the No. 1 factor).
  • The percentage of bad debt the insurance covers. (Generally 90 percent; but some companies are purchasing it with much higher deductibles.)
  • Geopolitical risk in the countries in which the company does business.
  • Risk profiles of the company’s customers.
  • Industry risk, industry default rates, for example.
  • Bad debt loss history of the firm.
  • How broadly the risk is spread among a range of the company’s customers.
  • Length of payment terms.
  • Credit limits on buyers.

The supply chain expertise and ability of the insurance provider to partner with the firm and offer a customized plan is critically important.

What is covered with trade credit insurance?

Click here to download the whitepaper

Click here to download the whitepaper

Trade credit insurers generally cover a wide range of problems that can disrupt payment, such as bankruptcies and defaults, as well as global political risks.

At the onset of the policy, the trade credit insurance carrier will analyze the creditworthiness and financial stability of the policyholder’s insurable customers and assign them a specific credit limit, which is the amount they will indemnify if that insured customer fails to pay.

It is the trade credit insurer’s responsibility to proactively monitor its customers’ buyers throughout the year to ensure their continued creditworthiness.

Throughout the life of the policy, the policyholder may request additional coverage on a specific buyer should that need arise. The insurer will investigate the risk of increasing the coverage and will either approve the additional coverage, or maintain the current coverage with a detailed explanation.

Similarly, policyholders may request coverage on a new buyer with which they’d like to do business. This information is constantly updated and cross-referenced.

When a company experiences financial difficulty, the insurer notifies all policyholders selling to that buyer of the increased risk and establishes an action plan to mitigate and avoid loss.

[Also by J. Paul Dittmann: Hidden Risks in Your Supply Chain]

Future trends and advice

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Trade credit insurance will be a popular service for U.S.-based companies, as European companies have been using it for years. The Great Recession and the globalization of trade have made it essential. More and more companies are getting on board, with approximately 15,000 companies in North America using trade credit insurance today.
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There is also a trend toward simplicity and customization. The knowledge gap regarding this product is significant. Therefore, insurance carriers know they must provide simple, straightforward, easy-to-understand policies that are flexible enough to accommodate the unique needs of an individual company.

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The additional risk management services that come with trade credit insurance are becoming more robust and sophisticated. Companies that offer this coverage know they must provide more than basic credit insurance. They must also provide guidance on developing a holistic plan to mitigate risks in their client’s supply chain.

The best advice is to invest time to learn about trade credit insurance. That should be as easy as placing a call to an expert in the field (such as the sponsor of this white paper).

Know that when the next big recession hits, it will be too late to buy trade credit insurance.

Also, make sure the company thoroughly understands its risk profile; trade credit insurance providers can help evaluate risks that might otherwise be overlooked.

Make trade credit insurance part of the company’s customer-focused strategy to meet and achieve a competitive advantage.goldbrown2


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J. Paul Dittmann, Ph.D. is the Executive Director of the Global Supply Chain Institute at the University of Tennessee. Dittmann comes to the University of Tennessee after a 30-year career in industry. He has held positions such as vice president, logistics for North America; vice president global logistics systems; and most recently served as vice president, supply chain strategy, projects, and systems for the Whirlpool Corporation.

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Reprinted with permission of Longitudes, the UPS blog devoted to the trends shaping the global economy.