Trade Credit Insurance - Discretionary Limits
What use is a credit insurance policy without any credit limits? The short answer is not much. When you have a policy with CMR Insurance Services, you can establish credit limits in two ways. The first by requesting a credit limit decision from the underwriter where they assess the creditworthiness of the business utilising various sources of information including financial reports, trading history and information obtained directly from the business, e.g. management accounts.
The second way is by establishing a discretionary credit limit. This covers a customer in the same way as a formal credit limit decision except the insurer doesn’t formally assess the customer. This can be set up to the maximum discretionary limit listed on your policy, which is usually £10k. Since the underwriter isn’t assessing the customer’s creditworthiness, there are two ways you can establish a discretionary limit – credit reports and trading experience.
- Credit reports – the policyholder can obtain credit reports on customers using a credit reference agency. They can set the discretionary limit (DL) up to the amount recommended by the referencing agency or the maximum discretionary limit stated on their policy, whichever is lower. Evidence of the credit report must be retained to use in the event of a claim. The report is valid for the period stated in the policy, normally 12 months.
- Trading experience – to establish a discretionary limit using trading experience with a CMR Insurance Services managed policy, you simply add up all payments received from a customer in the last 12 months that are paid within the Maximum Extension Period (MEP). An MEP is the point an overdue account becomes notifiable to the insurer under the policy, usually 45 days. The sum of the invoices paid on time equates to the maximum discretionary limit you can offer to the customer as long as it isn’t greater than the maximum DL on the policy. The DL is also subject to the credit terms the trading experience was established on.
Trade credit insurance is a type of insurance that protects businesses against the risk of non-payment by their customers. It is designed to cover a business's accounts receivable, or the money that it is owed by its customers for goods or services that have been delivered. Trade credit insurance can help a business to manage the risk of non-payment by its customers, particularly if it relies heavily on credit sales. It can also help a business to secure more favourable terms with its creditors, such as banks or suppliers, by providing an added level of protection against the risk of non-payment.
For further information on how CMR Insurance Services can help with your credit insurance needs, please get in touch.