How Much Does Accounts Receivable Insurance Cost?
Great question! And one that is asked often. The simple answer is…it depends. However, that’s not too helpful in the context of this post.
Let’s break down the factors that influence how much a credit insurance policy can cost.
Factors
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- Policy structure – Whole turnover, named buyer/key account, single buyer.
- Policy type – Cancelable limits vs. non-cancelable limits.
- In general, a spread of risk can reduce the premium rate. When there is adverse selection of the accounts receivable (A/R) to insure, the premium rate tends to be higher.
- Sales volume committed to the policy – Because the majority of policies are priced based on sales, higher forecasted sales typically result in a better premium rate.
- Retention or deductibles.
- Amount of approved credit on the policy.
- Buyer credit quality – It costs more to insure higher-risk debtors.
- Policy limit of liability – This can also influence cost.
As with other forms of insurance, the best way to determine the policy cost is to obtain multiple quotes. Through the quotation process, the applicant will gain a better understanding of how credit insurers view the risks they are trying to insure and, ultimately, the premium or cost to insure those debtors. There can be significant differences in quotes.
A starting point is the approved coverage limits. Is the insurer willing to approve the requested credit limits on the applicant’s debtors? If coverage isn’t available due to negative information or capacity issues, the cost is almost immaterial regardless of how low the premium is. Initially, it’s essential to ensure the needed coverage is available. If it is, the next step is to negotiate the terms, including policy cost. Through this process, the applicant can secure the best coverage at the most competitive terms. The credit insurance policy must support the business objectives, including fitting within the cost structure.
Interestingly, the policy cost is almost immaterial if the insured/applicant perceives a high likelihood of debtor default. The first question becomes, “Is coverage available?” However, at that point, it’s probably too late to insure the risk. If the applicant knows the debtor is distressed, the insurers likely know this as well and will decline to quote. A good analogy is trying to buy homeowner’s insurance once your house is on fire.
Key takeaway: A number of factors influence policy premium/cost, including committed sales, policy type, spread of risk, and buyer portfolio credit quality.
There is the direct cost of the policy premium, but less obvious are the overall cost reductions associated with relying on a credit insurer to insure receivables:
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- If they make the wrong credit decision, they pay the claim.
- Requires fewer internal resources to manage credit, thereby reducing expenses.
- Credit insurers continually manage credit exposure and actively update credit information, helping insureds avoid credit losses.
- Potentially reduces reserves for bad debt allowance.
Testimonials
Many companies find that accounts receivable insurance adds measurable value to their operations, not just through financial protection but also through peace of mind. Here’s what some of our clients have to say about their experience:
“The Securitas Global team has been fantastic to work with. Their professionalism and commitment set them apart. We value their advice, and the credit insurance solution they provided has not only protected our operations but has also played a key role in helping us grow our business. Securitas Global is very responsive and will follow through quickly to match the demands of today’s business environment. Highly recommend their services.”
–Ed Winter – Senior VP, Finance and Administration, Bachmann Industries, Inc.
“Securitas and credit insurance have allowed us to focus on expanding our business with confidence. They helped Everchem realize that credit insurance isn’t really a cost, but a way to expand business revenues while reducing the risk associated with bringing on new accounts. We were able to bring new customers with more revenues faster than our old model, all the while mitigating our risk. And unlike our other insurance policies, credit insurance does pay out in bad situations.”
–David Patten, CEO & CFO, Everchem LLC
Conclusion
The cost of accounts receivable insurance is influenced by multiple factors, such as committed sales, policy type, spread of risk, and buyer portfolio credit quality. However, beyond the direct premium cost, the indirect cost savings often offset the expense of the policy. These savings stem from reduced internal resource requirements, proactive credit risk management, and minimized credit losses. Interestingly, cost becomes almost irrelevant when a credit loss is imminent, as insurers are likely to decline coverage for known risks. This is why most insureds (92%–95%) renew their policies year after year—because of the value these policies add to their businesses.
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.
