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Core Components of a Trade Credit Insurance Policy

Core Components of a Trade Credit Insurance Policy

A trade credit insurance policy consists of several key components, including the policy specimen, declarations, endorsements, and buyer credit limits. Understanding these elements helps businesses manage financial risk and protect receivables effectively.

Policy Specimen

The policy specimen serves as the insuring agreement between the insured and the insurer. It outlines the obligations of both parties, including:

  • Covered risks
  • Requirements for an insured receivable
  • Exclusions
  • Claim filing periods
  • Claim settlement timelines

Policy Declarations

The declaration page summarizes the policy’s essential terms, typically based on the information provided in the application. Key terms include:

  • Sales Basis: Whether the premium is based on forecasted sales
  • Premium Rate: The percentage applied to covered receivables
  • Insured Retention: The amount the insured must cover, either through a deductible or coinsurance
  • Policy Limits: The maximum claimable amount under the policy
  • Reporting & Claim Filing Requirements: Specific conditions for submitting claims

General vs. Specific Endorsements

  • Endorsements modify or expand policy coverage. They fall into two categories:
  • General Endorsements: Apply to all policies, such as state-mandated provisions.
  • Specific Endorsements: Tailored to the insured’s credit and sales practices. For instance, a consignment endorsement ensures coverage when selling goods on consignment.

🔗 For details on how endorsements see LDI.gov.

Buyer Credit Limit Endorsements

Buyer credit limits define the maximum credit exposure for individual buyers or groups. These endorsements help businesses control risk while extending credit.

🔗 Find out how businesses assess buyer risk at Export-Import Bank of the United States.

Detailed Components of a Policy Specimen

Each policy specimen includes several crucial sections:

  • Coverage: Specifies covered risks, including buyer insolvency, protracted default, and political risk.
  • Claim Process: Outlines filing procedures, required documentation, and deadlines.
  • Exclusions: Lists situations that the policy does not cover.
  • Insured’s Obligations: Defines credit management responsibilities and reporting requirements.
  • Indemnity Period: Establishes the timeframe for submitting claims after a loss.
  • Dispute Resolution: Provides steps for resolving disagreements between the insured and insurer.

Why These Components Matter

A well-structured trade credit insurance policy ensures businesses can manage credit risk efficiently. By understanding each component, policyholders can maximize coverage benefits while complying with policy terms.

 

Disclaimer:

This blog post is meant to be informative and provide helpful tips and insights into credit insurance policies.  It is not meant to supersede any policy requirements.  Please consult your credit insurance policy for all requirements including claim filing deadlines and required documentation.

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provide value on numerous levels. As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring a complete understanding of policy wording and delivering excellent responsive service.

How (and When) to File A Claim for Late Payments

How (and When) to File A Claim for Late Payments

 

We are often asked when should the insured file a claim for non-payment?   And what documentation is needed as part of claim submission?

Trade credit insurance policies provide coverage for two types of credit losses:  Protracted default (slow-pay) and Insolvency (Insolvency is broadly defined, but most would recognize Chap 11 filing).  When to file a claim is straightforward as trade credit insurance policies clearly spell out the claim filing timelines for both protracted default and insolvency.

Let’s review when to file a claim first, and then claim filing documentation.

 

Protracted default / Slow-pay

The insured has a customer (referred to as a buyer) that is experiencing financial difficulties.  The buyer doesn’t dispute they owe the insured for the outstanding amounts, and wants to pay, but doesn’t have the ability to pay.

Following are a few reasons a buyer may not be able to fulfill their obligations to pay:

  1. Sales have declined due to overall economic conditions or
  2. The loss of a large customer
  3. One of their customers is not paying them
  4. Lost bank financing
  5. Increased interest payments due to leverage
  6. Fraud / mismanagement

For a comprehensive definition of protracted default, refer to the International Credit Insurance & Surety Association (ICISA).

Policy Timelines

Claim filing timelines vary by policy, but generally provide a window up to 180 days from invoice date.  This is 150 days past due on 30 day terms of sale.  If the terms of sale are greater than 30 days, the claim filing window could be longer.

 

When to File a Claim

The debt is within the claim filing window specified in the policy and you’ve exhausted your internal efforts to collect.  One of the non-negotiables for the insurer is late filing a claim (missing the window to file the claim).  The insured might be able to request a claim filing extension if the debtor is making payments, providing the debtor more time to pay.  The claim filing extension still has to be requested in the claim filing window.  If approved, this allows the insured to still file a claim if the debtor stops making payments or defaults on payment plan.

 

Insolvency

The claim filing window for insolvency is generally 10 – 20 days after receiving notification of the filing.  In addition to filing the claim, some insurers may require the insured to file a Proof of Claim with bankruptcy court.  If not required, the insurer will file the Proof of Claim on the insured’s behalf.  The insurer will settle the claim per the amount reflected on the Schedule F.

For more information on insolvency, see Investopedia.

Documentation

The claim filing documentation usually includes copies of purchase orders, contracts of sale, invoices, an aging report, bill of lading and/or proof of delivery, and in some cases the insured’s collection efforts.  The documentation has to be consistent, meaning it’s clear that the debtor ordered the products/ services (P.O’s or contracts), the product was delivered / service preformed (BOL / POD), the insured invoiced the debtor (invoices), the debtor is past due (aging report) and possibly collection efforts.   As part of the claim settlement process, the insured assigns their right to the receivables to the insurer.  The insurer will then try to effect recovery (protracted default / slow-pay).  Claim settlement will be delayed if required documentation is missing or unclear.

 

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provides value on numerous levels.  As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

 

Disclaimer:

This blog post is meant to be informative and provide helpful tips and insights into credit insurance policies.  It is not meant to supersede any policy requirements.  Please consult your credit insurance policy for all requirements including claim filing deadlines and required documentation.

What Credit Insurance Brokers Can Do for Your Business

What Credit Insurance Brokers Can Do for Your Business

A credit insurance broker offers independent, expert guidance to secure the best trade credit insurance coverage for your business. Here’s why working with a broker is a smart choice:

1. Key Benefit: Unbiased and Comprehensive Coverage

Unlike captive agents who represent a single insurer, a credit insurance broker works with multiple trade credit insurance providers. This flexibility ensures you receive the best coverage options tailored to your needs.

2. More Competitive Rates

Brokers leverage their extensive network of insurers to negotiate cost-effective trade credit insurance policies. Their ability to compare multiple carriers means you get the best possible rates without compromising coverage.

3. Client-Focused Support

With a broker, you receive dedicated customer service that addresses all your concerns quickly and effectively. Their expertise ensures long-term trust and seamless communication throughout your insurance journey.

🔗 Understand the benefits of broker support from Learn and Serve.

4. Clear Understanding of Policy Terms

A credit insurance broker ensures you fully understand the terms of your policy. Their guidance helps you avoid coverage gaps and ensures you are protected from unforeseen risks.

🔗 Learn about the importance of policy clarity at NerdWallet.

5. Faster Claim Payments

Brokers work diligently to expedite the claims process, ensuring timely payouts. Their industry expertise allows them to advocate on your behalf, reducing stress and maximizing your benefits.

6. Coverage Backed by Top-Rated Insurers

Brokers collaborate with financially stable and reputable insurance companies. This ensures your claims are backed by reliable insurers, giving you peace of mind.

7. Flexible Policy Options

Every business has unique risks. Brokers offer customized coverage options that align with your industry and operational needs, providing greater financial protection.

8. Brokers Help Reduce Costs, Not Add to Them

A common misconception is that brokers increase costs. In reality, their competitive approach helps businesses secure better pricing and more favorable policy terms than going directly to an insurer.

9. Ongoing Policy Reviews

Business needs change. Brokers conduct regular policy reviews to ensure your coverage stays relevant and effective, protecting you against emerging risks.

10. Access to Key Market Insights

Brokers stay informed on industry trends and market fluctuations, providing valuable insights that help businesses mitigate risks and seize opportunities.

11. A Dedicated Claim Advocate

If you need to file a claim, your broker is your strongest advocate, ensuring that claims are settled fairly and efficiently.

 

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provides value on numerous levels.  As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

Top 5 Benefits of Trade Credit Insurance

Top 5 Benefits of Trade Credit Insurance

How does trade credit insurance work?

Trade credit insurance is a type of insurance that protects businesses from the risk of non-payment by their customers. It works by providing coverage for losses that result from a customer’s failure to pay for goods or services delivered by the insured business. The insurance company assesses the creditworthiness of the business’s customers and sets credit limits for each customer. If a customer fails to pay, the insurance company will cover the insured business for a percentage of the loss, typically between 75% an 95% of the amount owed. The cost of trade credit insurance is typically based on the insured business’s sales volume, the creditworthiness of its customers, and the level of coverage desired. Five benefits of trade credit insurance include the following:

1. Facilitate Sales

Open account credit terms can facilitate sales by making it easier for customers to purchase goods or services from a business. With open account credit terms, the customer is allowed to purchase goods or services on credit and pay for them at a later date, typically within 30 to 90 days. This can be particularly attractive to customers who may not have the funds to pay for the purchase upfront, but who are confident they will be able to pay within the credit term period. By offering open account credit terms, businesses can attract more customers and increase sales volume. However, it is important for businesses to assess the creditworthiness of their customers and manage their credit risk appropriately to minimize the risk of non-payment.

2. Protect Against Credit Losses

Credit insurance protects the insured from credit loss by providing coverage for losses that result from a customer’s failure to pay for goods or services delivered by the insured business. The insurance company assesses the creditworthiness of the insured’s customers and sets credit limits for each customer. If a customer fails to pay, the insurance company will cover the insured for a percentage of the loss, typically between 75% and 95% of the amount owed.

In other words, if the insured experiences a credit loss due to non-payment from a customer, they can file a claim with the insurance company, and if the claim is approved, the insurance company will reimburse the insured for a portion of the loss. This helps to protect the insured’s cash flow and balance sheet, and can help them to continue operating their business even if they experience losses from non-payment by customers.

It is important to note that credit insurance policies typically have exclusions and limitations, and the insured must comply with certain terms and conditions in order to be eligible for coverage. Additionally, the insurance company will typically require the insured to maintain appropriate credit management procedures and documentation to help minimize the risk of credit losses.

3. Gain Access to Additional Working Capital

Trade credit insurance can help insured businesses gain additional working capital from lenders. This is because trade credit insurance provides protection against the risk of non-payment by the insured’s customers, which can improve the creditworthiness of the insured and make them a more attractive borrower to lenders.

When an insured business has trade credit insurance in place, lenders may be more willing to extend credit or offer better terms, as they have greater confidence that the insured will be able to repay the loan. This is because the insurance policy provides protection against the risk of non-payment, which reduces the lender’s credit risk.

In addition, some lenders may even require businesses to have trade credit insurance as a condition of obtaining certain types of financing. By providing additional protection against the risk of credit losses, trade credit insurance can help businesses obtain financing on more favorable terms, which can in turn help them to grow and expand their operations.

4. Buyer Credit Risk Evaluation

Credit insurers can help insured businesses evaluate the credit risk of their buyers. As part of the underwriting process, credit insurers typically assess the creditworthiness of the insured’s customers and set credit limits for each customer. This involves analyzing a variety of factors, such as the customer’s financial statements, credit history, payment behavior, and industry trends.

In addition to setting credit limits, credit insurers may also provide ongoing monitoring and reporting on the creditworthiness of the insured’s customers. This can help the insured to identify and mitigate credit risk more effectively, and can also help them to make more informed decisions about extending credit to new customers.

Some credit insurers may also offer other services to help insured businesses manage their credit risk, such as credit risk analysis tools, customer credit reports, and online credit monitoring services. By providing these services, credit insurers can help insured businesses to make more informed decisions about extending credit and manage their credit risk more effectively.

5. Leverage Insurers Global Underwriting Platform

Many credit insurers have global underwriting platforms that allow them to provide credit insurance coverage for businesses operating in multiple countries and regions around the world.

These global underwriting platforms typically involve a network of local offices and underwriters who are familiar with the local markets, regulations, and business practices in their respective regions. This allows credit insurers to provide more customized coverage and risk assessments for each individual market.

In addition to providing coverage for businesses in multiple countries, global underwriting platforms may also offer other services such as risk assessment tools, credit monitoring and reporting, and other resources to help businesses manage their credit risk across borders.

Having a global underwriting platform can be a significant advantage for businesses that operate internationally, as it can provide them with more comprehensive and effective protection against credit losses in a wide range of markets.

 

Securitas

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provides value on numerous levels.  As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

This article was generated by artificial intelligence and reviewed by Kirk J. Elken for accuracy.

 

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The Sudden Bankruptcy Filing of Vital Pharmaceuticals Inc / Bang Energy

The Sudden Bankruptcy Filing of Vital Pharmaceuticals Inc / Bang Energy

Could a Large Manufacturer be a Credit Risk?

Vital Pharmaceuticals is the third largest energy drink manufacturer in the U.S. and owns the Bang Energy brand. Now it is filing bankruptcy in the wake of multiple lost lawsuits, the latest of which awarded $293 million to Monster Energy for its false advertisement of its “Super Creatine” ingredient’s health benefits.  This is one of the largest awards under the Lanham Act. Vital Pharma’s sudden fall into bankruptcy highlights the need for suppliers to consider credit insurance to protect against buyer non-payment and ultimately their balance sheet.  Vital Pharma owed more than $500 million to unsecured creditors.

Vital Pharma Fast Facts and Timeline

  • Vital Pharmaceuticals Inc, a private company, located in Pembroke Pines, FL manufactures and distributes sports supplements under the name VPX, Redline Power Rush, an energy supplement, and Bang Energy, an energy drink.
  • Vital Pharmaceuticals introduced the Bang Energy drink product line in 2012.
  • Bang Energy was marketed as a “performance-enhancing and sports nutrition beverage” due to its “super creatine” ingredient.
  • According to Marketwatch the global energy drink market size was valued at $57 billion in 2021 and expected to reach $75 billion by 2027. Vital Pharmaceuticals / Bang Energy is the third largest energy drink manufacturer behind Red Bull Energy (38% of global market share) and Monster Energy (35% of global market share).
  • Vital Pharmaceuticals recently lost two lawsuits and settled a third which forced them to file for bankruptcy protection.

Key Legal Dispute Dates

  • 2018: Monster Energy Co filed a complaint in U.S. District Court for the Central District of California against Vital Pharmaceuticals, alleging false advertising.
  • 2020: PepsiCo and Bang Energy enter into exclusive distribution agreement
  • 2020: Bang Energy terminated the distribution agreement. PepsiCo sued for breach of contract.  An arbitrator ruled in PepsiCo’s favor that they were still the exclusive distributor.
  • June 2022 Bang Energy CEO Jack Owoc announced that all disputes with PepsiCo had been settled.
  • July 2022: In a separate lawsuit Monster Energy and Orange Bang (a separate beverage company) were awarded $175M through arbitration award for trademark infringement
  • Sept 2022: A jury sided with Monster Energy in its lawsuit against Bang Energy and awarded Monster $293M for false advertising regarding its “super creatine” content.
  • Vital Pharmaceuticals filed for Chap 11 on Oct 10, 2022. The three largest unsecured creditors were:
    • Monster Energy Company – $292,939,761
    • Orange Bang, Inc. – $214,757,614
    • PepsiCo – $115,000,000

Low Credit Risk Until Bankruptcy Filing

Vital Pharmaceuticals was a growing company in the expanding energy drink sector.  There wasn’t any indication, even in late September, that they would file for bankruptcy protection in early October.  Suppliers would have needed to be aware of the status of the lawsuits and the size of the potential jury awards while also reducing credit terms to avoid a loss.  The Schedule F includes a number of large, sophisticated companies extending significant credit to Vital Pharmaceuticals.  It remains to be determined how much, if any, they will recover through the re-organization process.  One supplier, using credit insurance as part of a comprehensive credit risk mitigation strategy, was very thankful that they had a policy in place.  The loss would have had a significant impact on the equity in their business.

Trade Credit Insurance

Trade credit insurance protects suppliers against non-payment due to insolvency and slow-pay.  The Vital Pharmaceuticals bankruptcy filing highlights that even when a buyer appears to be a low credit risk, unseen external factors can substantially increase the buyer’s credit risk. This lack of visibility can expose suppliers to significant credit losses. Even beyond legal liability, other external factors can silently increase the risk of a buyer, such as loss of a significant customer/revenue, loss of financing, change of ownership, etc.

About Securitas

Since 2004, Securitas Global Risk Solutions has helped clients develop credit and political risk solutions. As independent trade credit and political risk specialists, we are focused on developing comprehensive solutions that meet the needs of our clients. Please feel free to call us with any questions, or if we can be of any assistance.

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The Looming Corporate Debt Bubble

The Looming Corporate Debt Bubble

As we exit the COVID-19 pandemic, the economy appears to be aggressively recovering, fueled by pent-up consumer demand, low interest rates and cash from government stimulus programs. First quarter GDP grew at 6.4%. The Biden Administration just announced a $6 trillion budget, and currently negotiating with Congress for an infrastructure bill which will add another $1 – $2 trillion into the economy over the next several years. While largely positive, this combination has raised concerns about inflation as the prices of commodities, residential real estate, and basic food staples, transportation and travel are increasing. The Consumer Price Index rose 4.2% in April, the largest increase in twelve years.

Due to historically low interest rates, investors seeking higher yields are pouring cash into equities, real estate and alternative investments, such as cryptocurrencies, raising asset bubble concerns. The S&P 500 trailing twelve months (TTM) PE ratio is 31.36 vs. the thirty year average – 23.32. The median existing home price in April was $314,600, 19% year over year increase. Even with recent correction the crypto-currency market is now roughly $1.5 trillion, up nearly 600% from a year ago.

Less widely discussed however is the increased debt levels that corporations have taken on over the last ten years.

According to the Federal Reserve and Securities Industry and Financial Markets Association, large U.S. companies now face the highest levels of debt on record – more than $10.5 trillion. This figure doesn’t include small and middle market company debt estimated to be an additional $5 trillion.

Nonfinancial Corporate Business; Debt Securities

Source:  Federal Reserve Economic Data| FRED| Federal Reserve Bank of St. Louis 

While the coronavirus pandemic contributed to increased borrowing levels (nonfinancial corporate debt outstanding has grown by $1 trillion in two years), because of historically low interest rates, companies have been increasingly accessing cash through the debt markets since 2008 economic crisis.

 

Ten-year treasury yield:

10 Year Treasury Bond Yield

Source: Federal Reserve of the United States

Low interest rates have encouraged companies to borrow, but instead of funding business investment, in many cases the money was used for share buybacks to bolster share prices. According to JPMorgan Chase (Harvard Business Review, Why Stock Buybacks Are Dangerous for the Economy, Jan 2020) roughly 30% of stock buybacks in 2016 & 2017 were funded by corporate bonds. The International Monetary Funds’s Global Financial Stability Report, issued in October 2019 highlights “debt-funded payouts” as a form of financial risk-taking by U.S companies that “can considerably weaken a firm’s credit quality”. The authors conclude that “when companies do these buybacks, they deprive themselves of the liquidity that might help them cope when sales and profits decline in an economic downturn.”

This has left many companies with less flexibility to weather interest rate increases, or an economic contraction.

Non-financial corporate debt now stands at 40% of GDP:

Corporate Debt as % of GDPSource: Informa Financial Intelligence

 

Non-Financial Companies with Long-Term debt:

Nonfinancial Companies' Long-Term Debt

Source: “HowMuch.net, a financial literacy website”

The economic growth forecast for the second quarter and remainder of 2021 are positive. For federal budgeting purposes, the Congressional Budget Office forecasts 2021 real GDP growth rate at 5.6%. The highest since 1984 when the GDP annual growth was 7.24%.

Given the increased liquidity and consumer demand, the Federal Reserve will have the difficult task of managing interest rates to reign in inflationary pressures. Higher interest rates could have the dual impact of increased debt service levels and slowing the economy, both of which would negatively impact a highly leverage business.

As the saying goes “Everything thing is fine, until it’s not”. Companies will have to continue to diligently monitor credit even as the economy improves. Trade credit insurance and “Put” option contracts are two tools to assist financial executives evaluate credit risk and protect their balance sheet.

Credit Insurance

Trade credit insurance can be an integral part of a comprehensive credit evaluation and risk management strategy. Credit insurance protects the seller from buyer nonpayment due to insolvency or slow-pay. Credit insurers maintain extensive credit databases and actively capture, update and monitor debtor credit information. They often provide early notification if a debtor’s credit quality deteriorates, or financial performance declines. This information helps credit management professionals determine if, or how much, credit can safely be extended to a buyer.

“Put” Option contract

If a debtor is uninsurable (debt is rated CCC+ or lower), a Put option contract might be available. Put option contracts are non-cancelable and protect the seller if the debtor files for bankruptcy during the contract term. The contract terms are generally based on debtor credit quality, tenor and amount. Put option contracts have been limited to debtors with publicly traded debt. However, with recent changes in the Put option market, they can now be written on private debtors as well if financials are available.

Since 2004, Securitas Global Risk Solutions has helped clients develop credit and political risk solutions. As independent trade credit and political risk specialists, we are focused on developing comprehensive solutions that meet the needs of our clients. Please feel free to call us with any questions, or if we can be of any assistance.

Notes:

William Lazonick, Mustafa Erdem Sakinc, and Matt Hopkins. “Why Stock Buybacks Are Dangerous for the Economy.” Harvard Business Review, Jan 7, 2020, pages 2-3

HowMuch.net. a financial literacy website

Federal Reserve Bank of St. Louis

Congressional Budget Office, Nonpartisan Analysis for the U.S. Congress

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