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A guide to trade insurance

Trade insurance is also referred to as credit insurance or business credit insurance. It is an insurance plan that safeguards the seller of goods and services from any risk of non-payment. A trade insurance policy covers credit risks and helps to promote both national and international trade.

Trade insurance FAQs

The policy holder or seller may have sold goods or services on credit to a buyer and it is possible that the buyer defaults on payments due to insolvency, wilful default, economic conditions, political turmoil, currency fluctuations and so on. Importance Trade insurance helps cover international trade risks because its schedules are often impacted. Moreover, international customs and general laws are complicated and payments can be rejected on technical grounds. There is risk of civil strife, crazy government decisions, and government interference in private business. Then, there is an omnipresent risk of default in both national and international trade, especially in tough economic times. Trader's insurance and road insurance can work in tandem to minimise the damage and delays inflicted by local accidents. International and national motor trade, and a few export-heavy sectors consider trade insurance as a blessing in disguise. Cost of tradex insurance It works to about 1% of the insured value. Sellers typically insure goods on invoice value, so that they do not lose out on their profit margin, which helps them to cover interest payments. Sellers can increase the sale price by 1% if they do not want to bear the insurance cost. Premiums First, the total annual premium payable on all shipments is estimated. At least 75% of this estimated yearly premium is collected by the insurance company. The seller files a sales report every three months, and the premiums payable on the actual shipments are deducted from the premiums paid in advance. Accounts are reconciled at the end of the year and the balance premium payment is made. Functions The insurance company’s underwriters analyse the buyer’s creditworthiness and the risk involved. The insurance company then specifies the extent of credit that can be covered for that specified buyer. It then sets a discretionary credit limit, which the seller can extend to the buyer. Any violation of the discretionary credit limit is a breach of policy. Sellers can buy insurance on a per transaction basis as well. Sellers can insure a few buyers, but then they will have to convince the insurance company that they are not insuring just the potential bad debts.

Final word

Trade insurance is very important and every seller must cover all risks for his and the stakeholders’ sake. If a seller finds it difficult to buy trade insurance, he must consult a broker.

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