Credit insurance, as is well known, is an insurance policy taken out for protection against bad debts. It is a very important protection for companies in many kinds of business. In most businesses, there is always the chance of the occurrence of bad debts, because with even the best legal safeguards; there are chances of default by the company that owes money. It is to offset the damage from this kind of payment problem that many companies take out what is called credit insurance.
Credit Insurance has innovative uses. There are many ways by which businesses can buy credit insurance policies. They could opt for a credit insurance policy that protects their select business interests. These are some of the types of a credit insurance that can be put to innovative uses:
Key Account Insurance
As the name suggests, the key account insurance protects companies against a huge financial catastrophe, something that is in the order of having the potential of change the course of its business. This kind of key account insurance is all the more necessary in the uncertain financial climate most companies the world over work in. This kind of key account insurance is usually bank driven, and offers protection of price for the shareholder. On some occasions, a few companies use key account insurance for protecting their assets such as products or dollar amounts.
Medium Term insurance
This is another kind of credit insurance, one in which protection is offered on medium term loans and transactions, usually, but not necessarily, in the range of one to five years. Normally, medium term insurance is used by manufacturers or sellers of capital goods and financial institutions for protecting them when a buyer fails to pay.
Many times, some companies need a credit insurance policy to cover only one account. It is also possible that a company could need a separate policy for specific parts of the portfolio. This depends on the concentration of the business or type of product lines.
“Excess of Loss” principles
Of late, a new type of credit insurance with innovative uses has been taking shape in financial circles. Called “Excess of Loss” credit insurance; this credit insurance policy offers coverage without interfering in the policyholder’s credit management system. While the insured company keeps a good part of the sustainable structural credit risk; it delegates those portions of the risk that are considered exceptional, being unforeseeable in character, and which have the potential to jeopardize the very core of the company, such as its financial security or its survival.
The major advantage this modern credit insurance cover offers is that it exempts the insured from mandatory compliance with heavily imposed credit limits which would normally be considered unpleasant. It also desists from interfering in the business’ customer relations, as noninterference is one of the core aspects of this kind of credit insurance.