Credit insurance
What is credit insurance?
Credit insurance protects businesses from non-payment risks. It steps in when a customer becomes insolvent or fails to pay invoices. Companies with long payment terms or high outstanding receivables often rely on this protection.
To secure coverage, a business signs a contract with a credit insurer. The insurer evaluates the creditworthiness of the company’s customers and assigns a credit limit to each one. Only claims within these limits are covered.
If a payment default occurs, the insurer assesses the case. Compensation is provided, but often not in full and only after a waiting period. In many cases, a deductible applies.
Key features of credit insurance
Protection against losses due to insolvent or non-paying customers
Insurance covers only receivables within the predefined credit limits
Payouts often involve a waiting period and a deductible
Not all receivables are covered—there are exceptions and restrictions
How does credit insurance work?
Credit insurance offers protection, but coverage is subject to specific conditions and processes. Businesses must actively comply with these requirements to ensure their receivables are insured and claims are paid out in case of a default.
1. Signing the contract
The business enters into an insurance agreement with a credit insurer. Various models exist, such as insuring individual receivables or obtaining a policy that covers an entire customer portfolio.
The cost of the insurance depends on several factors:
Company revenue: Higher revenues typically result in higher premiums.
Industry risk profile: Sectors with high default risks pay higher premiums.
Customer creditworthiness: Businesses with financially stable customers receive better rates.
Insurance coverage amount: Higher credit limits increase costs.
Before issuing coverage, the insurer assesses the company’s financial stability and customer base to evaluate risk.
2. Credit assessment and setting credit limits
Once the contract is signed, the insurer analyzes the creditworthiness of the business’s customers. Based on this evaluation, an individual credit limit is assigned to each customer.
Only receivables within the credit limit are covered: Any amount exceeding this limit remains uninsured.
Regular credit assessments are required: If a customer's financial condition worsens, the insurer may reduce or revoke coverage.
High-risk customers may be excluded: Insurers may refuse coverage or impose low credit limits on financially unstable customers.
Businesses must continuously monitor their customers’ credit limits and request adjustments when necessary to maintain coverage.
3. Reporting and monitoring receivables
To maintain coverage, businesses must regularly report their insured receivables.
Only timely reported receivables are covered: Companies must register their outstanding invoices with the insurer.
Credit limits may change: If the insurer lowers a limit, previously covered receivables may no longer be insured.
Ongoing review is essential: Businesses should frequently check whether all customers remain fully insured.
If a company fails to report receivables correctly, the insurer may deny compensation in case of default.
4. Reporting a payment default
If an invoice remains unpaid, the business must report the payment default to the insurer within the agreed timeframe, typically 30 to 90 days after the due date.
Most insurers require prior collection efforts: Businesses must demonstrate that they attempted to recover the debt before submitting a claim. This may include:
Sending payment reminders within the specified deadlines
Hiring a debt collection agency
Initiating legal proceedings if necessary
Late reporting may result in claim denial: If the business fails to notify the insurer on time, the claim may be rejected.
To mitigate risks, businesses should implement effective receivables management and identify payment issues early.
5. Claim assessment and payout
Once a claim is submitted, the insurer determines whether the receivable is covered and if all conditions for payout have been met.
Extensive documentation is required: The business must provide proof that the receivable is valid and all policy conditions have been met. This includes:
Invoices and payment agreements
Correspondence with the customer (reminders, payment demands)
Evidence of collection efforts (e.g., engagement of a debt collection agency)
Payouts are often partial: Many policies include a deductible of 10% to 30% of the receivable amount.
Delays in payouts are common: Insurers often take several months to process and approve claims.
If a receivable is not properly reported or documented, the insurer may reject the claim.
When does an insurer pay a claim?
A claim is paid only if specific conditions are met:
The receivable is within the insured customer’s credit limit.
The default is reported on time (usually 30 to 90 days after the due date).
The customer was not already classified as non-creditworthy before the policy was issued.
The business has followed all contractual obligations (e.g., sending reminders, maintaining documentation).
When does the insurer not pay?
The credit limit was exceeded.
The receivable was reported too late.
The customer disputes the invoice or files a complaint.
The business has not taken any debt recovery actions.
Types of credit insurance
Single invoice insurance
Covers individual invoices. Suitable for businesses with a few large transactions.
Disadvantages: High fees, separate credit checks for each invoice, risk of rejection.
Comprehensive (whole turnover) insurance
Covers all eligible customers. Credit limits are assigned based on financial assessments.
Disadvantages: High ongoing costs, limited control over insured customers, possible limit reductions.
Political risk credit insurance
Protects against payment defaults caused by economic or political instability, particularly for exports.
Disadvantages: High premiums, limited geographic coverage, strict proof requirements.
How much does credit insurance cost?
The cost depends on the company, industry, and customer structure. Premiums typically range between 0.1% and 1% of annual revenue.
Additional costs may include:
Deductible: Businesses must absorb 10% to 30% of the receivable.
Minimum premiums: Many insurers charge a base fee regardless of claims.
Credit checks: Additional fees may apply for assessing new customers.
Administrative workload: Businesses must report and document receivables regularly.
Hidden risks
Long payout times: Claims often take months to process.
No full coverage: Even insured receivables may not be reimbursed in full.
Credit limit changes: If a customer’s financial standing worsens, coverage may be revoked retroactively.
When does credit insurance make sense?
It can be beneficial if:
The company deals with large transactions and extended payment terms.
Customers are international and difficult to assess.
A default could threaten business stability.
It may not be necessary if:
The company has strong credit management processes.
Defaults are rare and manageable through collection efforts.
The administrative burden outweighs the benefits.
What are the disadvantages of credit insurance?
1. High costs
Premiums apply even if no defaults occur.
2. Not all receivables are insurable
Customers with poor credit may be excluded from coverage.
3. Long waiting periods
Payouts often take several months. Businesses must manage cash flow in the meantime.
4. Significant administrative effort
Receivables must be reported and documented regularly. Errors or delays can result in denied claims.
5. Credit limit adjustments
Insurers can reduce or cancel credit limits at any time, potentially leaving receivables unprotected.