- TCI transfers a portion of accounts receivable risk from supplier to insurer, covering events such as buyer insolvency or protracted default.
- Unlike many insurance products, TCI is dynamic rather than static: coverage is continuously adjusted throughout the policy period to reflect changes in the supplier’s customer portfolio and broader market conditions.
- The policy lifecycle moves through five key stages with both the insurer and policyholder carrying active responsibilities at each step.
This chapter will unpack the process behind how trade credit insurance (TCI) transfers risk, and walk through the lifecycle of a policy.
How insurance transfers risk
TCI transfers a portion of the financial risk associated with accounts receivable from the supplier to the insurer.
When a supplier offers credit payment terms to its customers, it assumes the risk that the customer may fail to pay, either partially or in full. This risk is reflected in the company’s accounts receivable, often necessitating the establishment of a reserve for doubtful accounts – an estimate of receivables unlikely to be collected.
Under a TCI policy, the insurer agrees to compensate the supplier/ policyholder for a percentage of the loss if a covered event occurs, as defined by the policy’s terms and conditions.TCI often times allows a business to significantly reduce its reserve for doubtful accounts.
Typical covered events in a TCI policy include a customer’s insolvency or a protracted default. The policy outlines key parameters such as the maximum credit limit per customer, indemnity percentage, and any exclusions.
The lifecycle of a policy
A TCI policy differs from many other types of insurance in that its coverage is dynamic and continuously adjusted to align with the evolving needs of the supplier’s/ policyholder’s business. It adapts to changes in the supplier’s/ policyholder’s customer portfolio, credit exposures, and market conditions, ensuring ongoing relevance and tailored protection.
The lifecycle of a TCI policy generally includes the following stages:
| Policy underwriting and issuance | The TCI insurer evaluates the supplier’s overall risk profile to determine the policy’s terms, conditions, and coverage. Key underwriting factors include: – The company’s turnover, business model, and sector – Historical bad debt losses – Credit management practices and controls – The customer portfolio: including credit risk, concentration risk, payment terms, and geographic and sector exposure The insurer also considers coverage levels, deductibles, discretionary limits, and indemnity percentages, all of which influence the final policy structure. |
| Buyer assessment and credit limit allocation | The insurer assesses the creditworthiness of the supplier’s customers (referred to as ‘buyers’ or ‘debtors’) using financial data, payment history, and economic indicators. Based on this assessment, the insurer assigns credit limits to individual buyers, defining the maximum insured exposure for each buyer or buyer group. Many policies include a discretionary credit limit, which allows the supplier/ policyholder to insure buyers below a certain threshold without having to obtain approval from their TCI insurer. Under this arrangement, the supplier/ policyholder is responsible for conducting their own internal assessment of the buyer’s creditworthiness, either using the insurer’s pre-defined criteria or their own credit evaluation practices. |
| Continuous monitoring and ongoing trading activity | Throughout the policy period, both the supplier/ policyholder and the insurer monitor buyer credit limits and trading activity: Supplier/ policyholder responsibilities: – Monitor buyer credit limits and request increases if their credit exposure exceeds the established limit – Submit new coverage requests for additional buyers as new customers are added to the business. Remove credit limits which are no longer being used – For buyers insured under a discretionary credit limit, ensure ongoing creditworthiness and compliance with policy conditions. Insurer responsibilities: – Monitor buyers for changes in financial condition, payment performance, sector trends, and macroeconomic factors – Adjust credit limits as necessary and communicate changes to the supplier/ policyholder |
| Claims process | If a customer fails to pay within the agreed terms, the supplier/ policyholder may submit a claim to the insurer. Supporting documentation typically includes: – Detailed invoices, purchase orders, or sales contracts – Proof of delivery or service – A current ageing report – Correspondence with the buyer In cases of insolvency, additional documentation may be required. The insurer reviews the claim and, if valid, compensates the supplier/ policyholder according to the policy’s terms and conditions. |
| Policy renewal | Before the policy expires, the insurer and supplier/ policyholder review its performance and assess whether the coverage remains suitable for the supplier’s/ policyholder’s evolving business needs and risk profile. Based on claims experience or changes in the supplier/ policyholder’s business, the terms and conditions may be adjusted for the renewal period. |
Sources of insurer risk appetite
A TCI insurer’s risk appetite is a critical determinant of its underwriting decisions. It defines which buyers, sectors, and countries are eligible for coverage, the maximum credit limits that can be approved (either for a specific buyer or across the entire portfolio), and any conditions that may apply to that coverage.
Several key factors contribute to shaping a TCI insurer’s risk appetite:
- Reinsurance
Reinsurance conditions are among the most significant factors influencing a TCI insurer’s risk appetite. By transferring a portion of risk to reinsurers, TCI insurers can underwrite larger credit limits, support a broader customer base, and manage peak exposures more effectively.
Reinsurance also provides balance-sheet protection against volatility, particularly during systemic events where losses may accumulate rapidly across portfolios.
- Capital
Capital strength is another critical driver of a TCI insurer’s risk appetite. Insurers must maintain sufficient capital reserves to cover potential losses, especially given the correlated nature of credit risk during economic downturns. - Data and analytics
In the TCI industry, access to reliable and comprehensive information is essential. TCI insurers leverage extensive datasets, including company financials, payment behaviour, claims history, and macroeconomic indicators. Advanced analytical models are employed to estimate default probabilities and potential losses, enabling data-driven decision-making. - Sector and country risk considerations
Risk profiles vary significantly across industries and geographies. Insurers closely monitor sector-specific trends and adjust their exposure accordingly, particularly in industries facing economic challenges.
Similarly, country risk assessments take into account factors such as economic stability, regulatory environments, and political conditions, all of which influence underwriting decisions in different markets.
- Portfolio management
Effective portfolio management is vital for balancing risk across a diversified set of exposures. By distributing risk across sectors, countries, and buyers, TCI insurers mitigate concentration risk and reduce portfolio volatility.
In summary, a TCI insurer’s risk appetite is shaped by a combination of internal factors – such as reinsurance structures, capital adequacy, and data-driven insights – and external influences, including sector and country risk as well as macroeconomic conditions. Risk appetite is dynamically managed through portfolio diversification and continuous monitoring, ensuring resilience, disciplined growth, and the ability to adapt to changing market conditions.
