What are the benefits of receivables insurance?
The programmes offer protection against slow payment or insolvency of your customers with options of cancellable and non-cancellable coverage, as well as the potential to increase sales and enhance your operating line with your financial institution.
What does receivables insurance cover?
Generally the programmes provide a 90% indemnity, the client bears 10% of the risk, and protects against slow payment, bankruptcy and political risk. They are normally sales based and can include the offshore subsidiaries of the parent company.
How is the risk assessed?
Generally the programmes are written on a whole portfolio basis, though single risk programmes can be available.
At the application stage the existing customer base is assessed on an individual basis based on the credit limits as requested by the client, an average risk rating is arrived at for the portfolio, this is bench marked against the universe for that industry and a cost per thousand dollars of sales is determined.
For example:
- the average risk rating in the portfolio is a 5
- this translates into a rate of 0.35%;
- sales are $30 million per year;
- the premium would be $105,000.
The premium is payable quarterly in advance on an estimated sales basis, with an adjustment at the end of the 12 month period.
What happens when a claim is made?
Generally the client determines when a claim is filed. As an example, a slow payment claim normally has to be filed within 6 months of the date of invoice, though extensions will be granted where a workout programme is in place. The insurer has 60 days from when the claim is filed to attempt to collect, the claim is then paid out at 90% of the amount outstanding.
The claim can be paid to an appointed beneficiary, typically a bank which allows you to have better margining. Bankruptcy claims have to be filed within 3 months of the bankruptcy occurring.
