Credit insurance is a tool that enables companies granting payment terms to their customers to protect themselves against the risk of non-payment. Given the importance of late payments and the impact of unpaid invoices on corporate cash flow, credit insurance is often considered one of the key instruments available to manage this risk. The figures reflect this growing importance: in 2019, credit insurance premiums reached €7 billion, compared with €6 billion in 2016 (Source: ISACA).
Yet credit insurers are frequently criticized for not sufficiently supporting companies, for withdrawing coverage during difficult periods (particularly during the Covid-19 crisis), or for not covering risk precisely when it becomes material.
So why do so many companies still use credit insurance? Here are some key explanations.
An information and prevention tool
Credit insurance is first and foremost an information tool that supports a company’s credit management practices. It helps answer questions such as: What payment terms can I grant to my customer? What level of outstanding exposure does this create over time?
Based on these parameters, the insurer can grant a credit limit. These limits are a key indicator of a customer’s financial strength. In addition to public credit information providers (such as Creditsafe or Altares – Dun & Bradstreet), credit insurers have access to more detailed and confidential data, including payment behaviour with other suppliers.
A powerful collection support mechanism
Credit insurance also provides access to an effective debt collection service. The influence of credit insurers is such that customers are often more likely to settle overdue invoices quickly to avoid escalation through the insurer.
Indeed, a company facing collection actions risks losing supplier credit terms if the insurer intervenes, which can have a significant negative impact on its liquidity and operations.
In addition, credit insurers benefit from a strong local and international network, which enhances the efficiency of recovery processes. This is particularly valuable for export-oriented companies, where managing unpaid invoices is more complex than in domestic markets.
A support tool for receivables financing
Credit insurance plays a key role in managing customer risk, but it is also essential when it comes to financing accounts receivable.
When a factoring agreement is put in place, the factor typically requires adequate credit insurance coverage of receivables (generally at least 60–70%). The factor aims to finance only insured receivables. If credit insurance is already in place, the factor can rely on existing coverage, which speeds up and simplifies the financing process. Otherwise, a credit insurance assessment must be carried out alongside the factoring setup.
Going further
There is a wide range of policies tailored to different industries and business models. It is therefore recommended to conduct a detailed analysis of your activity and customer base before selecting a policy: which insurer to choose? What criteria matter most? What is the cost?
As a specialised broker, Fibus provides dedicated teams to analyse, implement, and support companies in managing their credit insurance programmes on a day-to-day basis.