Credit insurance is insurance for supplier credit. It clearly distinguishes itself from residual debt insurance, which only covers the area of bank loans and real estate loans. Credit insurance is always part of a deep and commercial relationship between supplier and buyer and always includes the entire flow of goods and associated services, broken down into different areas. Credit insurance is vital for both suppliers and buyers, because on the one hand it insures the goods during acceptance and shipping, and on the other hand, the supplier protects himself from payment defaults on the part of his customers. However, taking out credit insurance also often benefits the buyer, as it signals the willingness to provide additional security for the supplier and is therefore often rewarded with particularly favorable conditions such as discounts or discount offers.
History of credit insurance
Credit insurance in its current form has existed since 1917. Although there is information about similar procedures from the Middle Ages and antiquity, modern credit insurance only became necessary with the development of modern and international trade. The basic situation is that a company rarely has the necessary liquid funds and the planning security to make all the necessary purchases appropriately.
Accordingly, the companies always bought in the form of promissory notes, which, however, remained in the company as a residual debt in the event of the buyer’s insolvency, for which the owner could also be personally liable. The supplier often stayed on the debts, which were irretrievably lost for him. The credit insurance aims to alleviate this fact and to secure the purchase. It is an integral part of the purchase contract for commercial buyers and sellers and is sometimes expressly required by law. After a credit check, the insurance company assumes full liability via the credit line granted for the supplier credit. In the event of an unsuccessful reminder procedure, the supplier transfers his claim to the insurance company and receives the amount requested.
As a rule, the payout amount is 70% -90% of the total amount requested. The insurance company is now the sole creditor of the buyer and also represents this claim in the context of insolvency proceedings. However, this is only a rough description of how it works, since credit insurance can also include parts of production and other areas in which a contractual relationship arises between supplier and customer. A wide range is also available from insurance companies for foreign trade, but deliveries to countries with an uncertain political situation are usually not insured. Here the residual risk remains exclusively with the supplier. Deliveries to countries that are subject to sanctions based on the country where the insurer is based are usually not insured under national law.
Forms of credit insurance and impact
Credit insurance not only includes supplier contracts, but can also be expanded to include productions and services. In both cases, however, the principle of delivery & services is still decisive, so a supplier contract must be drawn up and a contractual relationship between the parties involved must have arisen. The credit insurance for production and services usually includes a number of additional options that provide comprehensive protection for both the supplier and the buyer. For example, additional costs incurred in the course of production and development are covered, failures are financially secured or general damage to property is covered by shipping.
Consumer loans can also be covered by credit insurance. This insurance is ideal for sellers with a high share of financing from their sellers, it not only protects the supplier, but also the seller against a payment default by the end buyer and thus enables a smooth flow of trading. Credit insurance had and still has a significant impact on the movement of goods. Because the insurance companies have a natural interest in a successful and safe transfer of goods, which is why they apply a number of criteria for the processing of individual purchase contracts. The basis for this is the standardized contracts that are required in advance and are intended to significantly simplify the risk management of the insurer. This also includes strict requirements for shipping, the production methods or the design of the development department.
On the part of the companies, these specifications are rarely perceived as disturbing, since they were discussed in advance and compared and adjusted together with the goals of the company. However, credit insurers have an enormous impact not only on the movement of goods, but also on prices and overall economic developments. Especially in the context of industry crises or the current financial crisis, credit insurers are often the decisive factor for the success or failure of small and medium-sized companies. These often have a relatively low credit rating and are usually more dependent on the insurer than a large group.
Especially in times of crisis, the cost of insurance increases dramatically, since insolvency tends to occur more often than in times of good economic activity. Of course, credit insurers pass this risk on to their customers immediately, with creditworthiness playing a decisive role. The higher the credit rating, the lower the risk, the lower the costs – this formula applies here as well as for all other insurances. But it’s not just the credit rating that matters. During the last automotive crisis, insurance companies tended to grant poorer conditions to the automotive industry, which is characterized by an increased risk of bankruptcy. This led to massive effects for sellers and employees, which continued until 2012 and, according to the industry association, slightly weakened sales in Europe.