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14 August 2020

Trade credit insurance guidance 

There may be a number of potential implications for trade credit insurance policies where businesses are trying to manage cashflow, and work with buyers and suppliers.

At this time it’s worth revisiting the conditions and obligations of these policies to help mitigate business risk.

First and foremost, businesses must keep their insurers informed of any material circumstances that may be deemed a ‘notifiable event’. The following points should also be considered.

Maximum Extension Period (MEP) breaches

Challenging circumstances heighten the chance of late payments. Most trade credit policies have a MEP to allow for this. It specifies how many days from the original due date a business has to work with the buyer to organise payment.

It is important to be aware that once the MEP has been breached, businesses must stop supply to the buyer as any goods provided past this date will not be insured.

As an MEP breach is deemed a ‘notifiable event’ the insurer must be notified immediately and provided with a statement and all outstanding invoices. Your broker can provide guidance on how to lodge this in the insurers’ system and the subsequent process to be followed.

Signs of payment default or insolvency

If there are signs that a buyer will fail in their obligations to pay, this is also deemed a ‘notifiable event’ and the insurer must be informed.

What signs are considered as ‘notifiable’ is often queried, as all correspondence is different. Generally however, insurers want to be aware of material facts; something which would influence the judgement of the insurer when deciding on what to insure along with setting the terms and conditions and premium.

Below is an example of a material fact an insurer would expect to be notified of:

  • ‘There is an outstanding $100K invoice. While it is not overdue, the buyer has stated that they are not able to pay the invoice due to creditworthiness issues.’

We recommend always erring on the side of caution and lodging your concern on the insurers’ system if you have any doubt. The insurer can accordingly decide a course of action such as monitoring the debt or intervening.

Credit limit reductions

By reducing or removing unneeded limits, businesses may be eligible for a premium rebate at the end of the year.

This is subject to minimum premium conditions and requires businesses to declare actual turnover for the prior year during the end of year premium reconciliation process.

This also allows insurers to proactively manage risk and focus their underwriting on insurance actually needed during this period.

Support is available

One of our core responsibilities as a broker is to ensure you have all the information you need to make informed decisions about the risks your business faces.

With the effects of Covid-19 being felt in a number of ways by our clients across the country, we wanted to share some proactive advice to help you protect your business during this difficult and unprecedented time.

We hope you find the information above helpful. If you have any questions or if you would like to speak to us regarding trade credit insurance please contact your broker.

Further information

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