Accounts Receivable insurance is a straightforward concept. It’s an insurance policy that renews annually. Key policy terms include the Insured (seller), the insured products / services, terms of sale, any retention and the buyer credit limits (the seller’s customers). Unlike other forms of insurance, the policy is actively managed. The policy changes as the Insured’s sales, buyers and credit limits change.
How does it work?
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- Seller receives sales order from buyer
- Seller establishes credit line on the policy (online policy management)
- Seller extends credit to a buyer and ships the products / provides the service
- The buyer has an inability to pay for products / services
- The seller files a claim against their insurance policy
- The insurance company pays the insured per the policy terms
That’s it. Accounts Receivable insurance.
While AR insurance is gaining traction and utilization, most companies are not aware the insurance is available. First and foremost, most property & casualty brokers do not inform their customers that the insurance exists. Secondly, and probably more importantly, companies only seek / research a solution when a customer is not paying them. At this point, its too late to cover the current loss, but the loss could be so painful the business doesn’t want to suffer a future credit loss, so they implement a policy.
Key Takeaways:
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- A/R is often the largest asset on the balance sheet
- The only asset that is uninsured
- The likelihood of loss from non-payment of a receivable is greater than some property damages
- Can reduce cost of managing credit and making credit decisions
A credit loss can have significant impact on P & L.
For example, a credit loss goes right to the bottom line. A company with 10% profit margin would have to generate $1M additional sales to compensate for $100K credit loss.
Additionally, a credit insurance policy may help reduce Bad Debt Allowance. The following video is very informative:
Source: Simple Explain via YouTube
Because there is wide variation in policy cost and underwriting results our recommendation is to obtain a number of quotes. The application process is not difficult. The application includes forecasted sales, any credit losses, your terms of sale, the products / services being sold and usually your top 20 – 25 customers.
Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provide value on numerous levels. As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring a complete understanding of policy wording and delivering excellent responsive service.
