Trade credit insurance is insurance that protects a business selling goods or services on credit terms against losses when its customers do not pay. It covers business-to-business receivables, both domestic and export, against the buyer's insolvency and protracted default, and for foreign buyers it can add political risks. It is sometimes called credit insurance or accounts receivable insurance.
The product is sold mainly by specialist private insurers and is largely short term, covering invoices payable in days or months rather than years. Its cross-border form is known as export credit insurance, the segment where government-backed export credit agencies also operate. Trade credit insurance differs from a surety bond, which guarantees a company's own performance to a third party, and from deposit insurance, which protects bank depositors.
Trade credit insurance in plain terms
A wholesaler that ships goods today and is paid in 60 days is lending money to each customer for two months. Most customers pay, but one large failure can wipe out a year's profit. Trade credit insurance works like a safety net under that lending: the wholesaler pays a regular premium, and if a covered customer goes bust, the insurer pays most of the unpaid bill.
The insurer also acts as a lookout. It studies customers, tells the seller how much credit it is willing to cover for each one, and warns when a customer looks shaky. Many sellers value that advice as much as the payout, because it helps them avoid bad debts in the first place.
How policies work
The central tool is the credit limit. For each buyer, the insurer sets the maximum exposure it will cover, based on financial statements, payment records and its own databases. Sales above the limit are uninsured. The insurer can lower or withdraw a limit for future shipments when a buyer's position worsens. Common policy forms include:
- Whole-turnover policies. All of a seller's credit sales, or all within a country or business line, are covered, which spreads risk and keeps premiums lower.
- Key-account or single-buyer policies. Cover for one or a few large buyers, often required by a lender financing those receivables.
- Excess-of-loss policies. The insured keeps losses up to a large deductible and is covered above it, used by big companies with their own credit departments.
Most policies pay a set share of the loss, often around 90%, after a waiting period for protracted default. The insured must report overdue accounts and follow collection steps; once it is paid, the insurer takes over the right to recover the debt.
Premiums are usually charged as a rate on insured sales or on outstanding receivables. A simplified view of the cost and benefit is:
The rate depends on the industry, buyers, countries, payment terms and the seller's loss history. Suppose a distributor insures annual credit sales of $20 million at an assumed rate of 0.2%. The premium is 0.002 × $20,000,000 = $40,000 a year. If one buyer with an approved limit of $500,000 owes $450,000 when it becomes insolvent, and the insured share is 90%, the claim paid is 0.90 × $450,000 = $405,000. Without insurance, that single loss would equal ten years of premium.
Market and financing uses
The market is concentrated. Three groups, Allianz Trade (formerly Euler Hermes), Atradius and Coface, write a large share of global premiums, alongside many national and specialist insurers. Insurers protect their own balance sheets by buying treaty reinsurance, commonly on a quota share reinsurance basis, and some governments act as reinsurers of last resort in a crisis.
Banks and other funders often require trade credit insurance before they lend against receivables. It supports factoring without recourse, receivables purchase agreements and asset-based lending, and it can help an insured seller reduce its credit risk concentration in accounts receivable. For a lender, an insurance policy can count as credit risk mitigation for capital purposes if it meets the relevant prudential conditions, though it is weaker than a bank guarantee because claims can be disputed.
Limitations
Trade credit insurance is procyclical: when the economy weakens, insurers cut limits just as companies need them, which can squeeze supply chains. During the 2008–09 financial crisis and again in 2020, several European governments, including the UK, Germany and France, created temporary state schemes to keep insurers' limits in place. Other limits include exclusions for disputed debts, the cost and paperwork of compliance with policy terms, the uninsured share of each loss, and the risk of a rejected claim if the seller breached a condition such as late reporting. Insurance also does nothing to speed up cash flow; firms that need cash sooner combine it with financing. It is one tool among others for managing days sales outstanding (DSO) and buyer risk, alongside open-account trade terms, letters of credit and working capital planning.