How Credit Insurance Coverage Decisions are Made

When considering a credit insurance policy, everyone needs to understand how coverage decisions are made by the insurance company. After all, approving coverage (protection) of your customer accounts is why companies use credit insurance in the first place.

A coverage decision is simply the process the credit insurance company uses to evaluate the financial ability of your customer to pay the money they owe your company for the sales you’ve made to them. This is done on a customer-specific basis and is how credit insurance companies measure their risk.

Before reviewing the coverage decision-making process, be aware that your credit insurance company is an extension of your own internal credit process. We view ourselves as partners with our clients and by working together, we help you make the most informed credit and business decisions about the most important aspect of your business: cash flow and revenue growth.

Sometimes, the best decision is NOT to approve coverage because of increased risk or uncertainty about the customer’s financial ability to pay your invoice. In this way, we help steer our clients away from bad financial risk so that you avoid a problem before it happens.

But on with the show… how are coverage decisions made?

 

Enter coverage requests

As a policyholder, the first step in a coverage decision is for you to ask us, the insurance company, to evaluate the creditworthiness of your customer. There are two ways to do this:

1. You do it yourself – through the insurance company web portal. In my case at Coface, this site is called Cofanet
2. We do it for you – by emailing us with the customer specifics (name, location and requested coverage amount)

The majority of requests are entered through Cofanet because it’s faster and easier for you, the policyholder.

 

Considerations for coverage

For an underwriter to do their job, the company you’re requesting (the “buyer” in credit insurance lingo) must be in our database and confirmed to be in operation. In cases where the buyer isn’t in our system, it’s simple to add them. Adding the buyer starts a process of building a credit file, which lets the underwriter make a coverage decision for you.

 

Underwriter review

Once the coverage request is entered, it is assigned to an underwriter. In credit insurance, an underwriter is a financial analyst that reviews the buyer’s financial information and decides whether the requested amount of coverage can be approved.

There can be three potential answers to your coverage request:

1. Approved in full
2. Partially approved: because of a lack of financial information or because of negative information (equity, cash flow, leverage etc.)
3. Denied: usually due to negative information or a total lack of information

When partial coverage is approved, we can work to get more current information and re-consider the full amount. When coverage is declined, the reason is always given and the request may be re-considered if we can get more favorable information.

 

Turnaround times

Most coverage requests are answered within 24-48 hours. For smaller requests (less than $100,000), the answer may be immediate since our system will do this automatically. In situations where we need to get more financial information, a decision will take longer depending on how long it takes to get information. In the vast majority of cases, the answers are within a day.

The size of the coverage request determines the kind of financial information the underwriter must have. Requests for less than $100,000 are often made based on a favorable credit report or are auto-answered by our system. Requests above $100,000 generally require a financial statement from the buyer. Much larger requests, above $1 million may require audited financial statements from the buyer.

Financial information is the basis for all credit decisions. We objectively measure the financial risk of selling to a buyer based on several considerations including:

1. Ratio Analysis (cash flow, liquidity, leverage, profitability) that measures the efficiency of the business
2. Our history and knowledge of the trade sector of the buyer
3. The financial and economic climate of the buyer’s country (for export accounts)
4. Our history with the buyer itself (claims, reports of slow pay, amount of total exposure worldwide)

 

Suggestions for the best experience

• Request coverage before you need it. Usually, this means while you’re considering whether to accept a purchase order instead of after you’ve already shipped the product! Let us analyze the buyer so you know beforehand whether to take the business or not and under what terms. Also, underwriters can have a backlog of requests and may not be able to give you an instant answer.
• Details matter! We need to know the specific and exact name of the company you’re selling. ABC, Inc. is not the same as ABC, LLC or ABC Holdings Inc. These details matter legally. Know who your customer is so we’re covering the right company.
• If you have financial information on your buyer, share it with us. It sometimes makes the process go faster and by sharing information with each other, we can all work together to get you the protection you need and help us both make more informed decisions.

 

Conclusion

Coverage is the basic part of a credit insurance policy. By knowing how the process works, you’ll know how your policy will work in your business on a day to day basis.

For more information on how credit insurance works, see Back to Basics: What is Trade Credit Insurance?

Want to learn more? Email me at tate@tateparker.com or to schedule a call with me click here!