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India Insurance Report - Series II 239

Financial executives must continuously balance the cost of doing business with the risk of doing business.
They should weigh the cost-benefit of several options in an effort to mitigate trade credit risk. Each one
8
should be investigated carefully to determine the best fit for their organization. Some of the more common
methods are: self-insurance, factoring and trade credit insurance. Trade credit insurance is the most popular
measure against bad debt in Europe, and almost one-third of companies use trade credit insurance. 9

2. The Nature of Trade (Commercial) Credit Insurance

Trade credit insurance is an arrangement between an insurance company and a business firm under
which the firm as the insured is guaranteed indemnification against abnormal credit losses arising from
the failure of business debtors to pay and, because of this relationship, receives other auxiliary services
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or benefits (see Figure 1).
Figure 1. Credit Insurance Relationship

Source: J. Lisowski, Ubezpieczenie kredytu i gwarancje ubezpieczeniowe, in: Ubezpieczenia
gospodarcze, ed. T. Sangowski , POLTEXT, Warszawa 2001, p. 242.

Trade credit insurance offers protection to suppliers of goods and services against the effect of
insolvency or default by the purchaser and political risk. The services provided by credit insurers vary
widely. They range from strong involvement by underwriters, with the establishment of credit limits
and debt collection services controlled by the underwriter, to policies where the underwriter has hardly
any input in credit-limit decisions or debt management. In most cases, underwriters tailor products
according to the needs of companies. Trade credit insurance is thus more than a simple insurance policy.
It can be a complete risk management tool that helps management to put in place the necessary procedures
to prevent and minimise late payments and defaults, reducing the risk of the receivables portfolio and
enhancing the capacity of using commercial credit as a competitive tool. 11

8 J. Ketzner, An Overview of Trade Credit Insurance, Euler Hermes ACI, p. 1.

9 European Payment Industry White Paper 2018. (2018). Intrum, s. 8–9.
10 C. W. Phelps, Commercial Credit Insurance as a Management Tool, “Studies in Commercial Financing”,
No. 3, Educational Division Commercial Credit Company, Baltimore 1961, p. 10.
11 A. S. J. Riestra, op. cit., p. 1.