Ko-bolt works closely with a number of leading Insurance Brokers who are able to assist with all types of insurance from public liability through to trade credit insurance. Credit insurance is perhaps the most closely linked service to debt recovery, since it provides protection in the event of company default due to insolvency and in many cases protracted default (the technical term the industry uses for late payment).
What is credit insurance?
Excess of loss, whole turnover, ground-up, selected buyers, named buyer – these are just some of the many types of credit insurance policy available in the market and this is before you start to look at policy wordings, so you’d be forgiven if you were feeling confused. But first, what is Credit Insurance? “Trade Credit Insurance is a type of insurance policy which provides cover for businesses if their customers who owe money for products or services do not pay or are unable to pay their debts.” – the Association of British Insurers (ABI).
Ultimately, credit insurance replaces the money which would have been lost by a supplier as a result of a customer insolvency and in many cases, protracted default (late payment). Indemnity levels vary from 70% to 100% of the debt value, but typically, a policy will pay 90% of the confirmed debt value.
Why buy credit insurance?
Insurance is designed to give you protection and peace of mind that if things don’t go to plan, you can call upon your insurer to mitigate your loss. Credit Insurance goes much further than this, after-all they want to do their best to help you to avoid bad debt and therefore claims. As a result, Credit Insurance can do much more for your business:
Credit insurance FAQ
Below you will find answer to our most frequently asked questions, but if you don’t see what you’re looking for, please complete our friendly team, who’ll be happy to answer any questions.
In short, yes. The industry is forever changing, insurers are always thinking of new and innovative ways to bring new products to market. But, below you will find a brief overview of the most common types of policy together with the pros and cons associated to each.
Excess of Loss – XoL
Excess of Loss, or XoL as it’s more commonly known, is a type of policy typically reserved for large businesses and corporations. They are designed for businesses which have strong credit management policies and take on the majority if not all of the underwriting responsibility themselves.
These businesses are likely to have strong in-house credit management and risk strategies. It is usually the job of an in-house Credit Risk Analyst to assess the credit status of new and existing buyers in detail. They are responsible for agreeing credit limits up to a level imposed by the insurer. This is referred to as the discretionary Level or DL. For XoL policies this tends to be sizeable (minimum £50K, the maximum can be £1.5 million+), but it depends on the strength of the credit management process, premium spend and size of the deductible.
All businesses operating on open credit are exposed to risk and the larger the business, the larger the exposure. Large businesses and corporates typically have a level of bad debt which they consider to be sustainable and they make provisions for this. But what happens if there’s a large unexpected loss? XoL policies exist to mitigate this risk and use the sustainable debt level to help them set the aggregate deductible (sometimes called and Aggregate First Loss or AFL for short). This is the value that the losses must exceed before a claim can be made on the policy.
Pros: Large discretionary limit. Autonomy. Lower premiums when compared to whole turnover.
Cons: High internal policy management costs. Increased accountability. High aggregate deductible.
Whole Turnover (WTO)
Whole Turnover (WTO) or Ground-Up as it’s sometimes called, is the most common type of Credit Insurance policy. It tends to be used the most by the SME market as it provides a much larger scope of cover than the XoL product. There are numerous insurers to choose from and they all have their own policy wordings and advantages. The similarities are; most will offer a small discretionary limit, all other limits are approved by the insurer; policies tend to pay out 90% of the net debt value, subject to a first loss (the amount a policyholder must withstand before a claim is valid – an excess of sorts).
Pros: More comprehensive protection than some other types of policy. Some insurers offer free debt collection. A discretionary limit available on most policies.
Cons: Larger premiums than other types of cover. Not all buyers may be covered. Maybe inaccessible to micro businesses and some SMEs.
Single risk and named buyer
Named buyer and Single Risk policies are, as the name suggests, specialist policies which allow the policyholder to insure a selection of risks or a single risk. They are very inflexible by nature. However, for a special project or when WTO simply doesn’t work due to the limited number of buyers, this type of policy can be perfect.
Pros: Alternative solution to WTO when a WTO policy doesn’t fit the requirements. Perfectly suited for short to medium term projects.
Cons: Cover is typically only available on well graded businesses. No discretionary limit. Cover may be cancelled without notice (subject to terms).
Invoice Insurance is a fairly new approach to credit insurance. It enables the user to insure individual invoices against non payment. This service is available online and direct to the policyholder.
Pros: Simple, flexible, instant and available online 24/7.
Cons: Capacity can be an issue. No credit limit unlike other types of cover. No discretionary limit. Typically only covers insolvency, not protracted default.
As a subset to invoice insurance, a user/client may have a primary policy with another credit insurance provider. When an insured is unable to obtain any cover from their primary insurer or cover is ‘pulled’ meaning that they have no limit in place, the client may purchase invoice insurance cover to fill the gap left by their primary policy.
Pros: Enables you to trade safely and fulfil orders while you reassess your position
Cons: It’s usually only available short-term. Adverse risk selection means it can be expensive. Some primary insurers will not allow gap-fill.
Where an existing credit insurance policyholder is unable to obtain cover to levels they desire from their primary insurer, it may be possible to obtain Top-up insurance within the market. Top-up insurance enables the insured to have a limit with their primary insurer which is ‘topped-up’ to the desired limit by another insurer. It’s generally only available on very low risk businesses. It is most often required because the primary insurer has run out of capacity as opposed to them having concerns about the buyer.
Pros: Enables you to trade safely and fulfil orders.
Cons: Can be expensive. Inflexible.
There are a variety of underwriters offering credit insurance products, but very few of them have a direct sales team. Instead, many prefer to work in partnership with insurance brokers. Due to the specialist nature of the product, brokers which operate in this space are usually referred to as specialist brokers. We work with a number of specialist brokers, which together cover the whole of the UK – we’d be happy to make an introduction.
Full market review
As mentioned above, very few underwriters offer credit insurance directly to the market. It is the job of a specialist credit insurance broker to have a relationship (aka an agency) with the insurers offering credit insurance services. They will spend time with you, reviewing your credit procedures, credit limit requirements and any nuances which affect your business and trade.
Not all insurers have appetite for all types of policy. Once the broker has a full picture of your requirements, they will approach the applicable insurers for terms. This way, you will be able to compare and contrast ALL insurers’ terms which are available and not just the ones which can be approached directly.
The broker will review the response from the market, taking into account the policy terms and the availability of cover on your buyers. They will negotiate with the insurer on your behalf to ensure that you get the very best that the market has to offer before making a recommendation on the policy/insurer which is the most appropriate fit for your business.
Credit limit appeals
Insurers have access to lots of proprietary information about buyers such as management information and payment behaviour. Insurers may not agree to cover a customer to the desired level. They may also make an amendment to an existing credit limit, leaving you unprotected if you decide to continue trading with them. When this happens, having access to the risk underwriters is crucial.
When this is the case, it’s the brokers job to find out why this is the case and, more importantly, how to get the cover in place going forward. Your broker will challenge refused or partially agreed decisions on your behalf and where necessary advise what is required to assist the insurer in their decision making.
When submitting a credit insurance claim it is important to provide the correct information and in the required format in order for it to be promptly reviewed. Whether it’s an insolvency claim or a protracted default claim, the broker will advise what information is required and ensure it is correctly presented to the insurer. This speeds up the claims process and enables the insurer to settle claims quickly.
The renewal process can be costly and time consuming if a broker isn’t involved. As previously mentioned, not all insurers will deal with companies without a broker, so dealing direct will mean missing out on what other insurers can offer, and that could have been a better fit for your business. Also, credit limits differ from each insurer as do policy structures and premiums. A broker knows what to look for when advising the client which insurer to choose.
Brokers are paid on a commission basis by the insurer, so their advice, guidance and support in finding the right policy and maintaining it throughout the policy period is free of charge.
Self-insurance consists in building up your own financial reserves – also known as a “bad debt reserve”, The idea is that the reserve will cover your losses in the event of a bad debt. It is the simplest solution and the least expensive, but your credit risk exposure here could not be greater, and damages to your business can be significant in the event of a large unexpected loss (known in the industry as a torpedo loss). When deciding to self-insure, it’s important to consider the following:
- You will not have the support of an insurer to assist you with the credit risk analysis on your customers.
- A torpedo loss could have a significant impact on your business and you may not be able to recover.
- You tie up cash flow on your balance sheet.
Letter of credit
A letter of credit, also known as a documentary credit or bankers commercial credit, or letter of undertaking, is essentially a promise from your customer’s bank to pay you when you have certified the proper execution of your obligations (delivery, nature and quality of the delivered goods or services, paperwork etc.).
It acts as security for both you and your customer, where the risk of non-payment is transferred to the bank. Used almost exclusively for overseas customers, it allows you to trade with the certainty of knowing that you’ll be paid for the goods you export.
No, this isn’t the case. According to research commissioned by the Lloyd’s Market Association (LMA) and the International Underwriting Association (IUA). Its analysis of claims performance data found the market paid more than $3.3 billion in claims from 2007 to 2019.
Let’s for a moment compare credit insurance to car insurance. You’re driving down the road and you see an obstacle in your path, do you drive straight through it because you’re insured or do you carry out your own risk analysis and act to avoid the impact?
Credit Insurers carry out risk analysis on buyers everyday through their teams of expert underwriters. Their job it is to look down the road and foresee obstacles in your path, using credit limits to help steer you away from buyers which could be a risk to your business.
If someone ‘pulls out’ unexpectedly, little can be done to avoid the risk, all you can do is slam on the brakes and hope for the best. Ultimately, credit insurance exists to protect you from the unexpected. If you can’t get a limit on a buyer, you must consider why the insurer won’t provide cover.
Credit insurance isn’t cheap. But, how do you benchmark the cost? At the end of the day, there’s nothing else in the market quite like it.
Unlike other forms of commercial insurance; marine and cargo, professional indemnity, etc. the chances of a credit insurance claim is far higher and the price of insurance is determined by the risk.
According to the office for national statistics, the average profit margin for UK businesses is 10%. If you lost £10,000, it would mean you having to do £100,000 in additional sales just to break even (we have a useful calculator which enables you to tailor this for your business’s profit margin). The additional growth, confidence and peace of mind which comes as a benefit of the protection means that the service pays for itself many times over and that’s before you factor in any claims you may have.
The price you pay via a broker will be the same as if you went to the insurer direct. Actually, using a broker means that you will likely get better terms, because they will approach more insurers on your behalf and negotiate the best cover and terms.
Working together with:
Ko-bolt is not an insurance provider. Our website is free to use, and we may receive a commission from insurance brokers you are introduced to via our team.