K. Somsak Chaivichit
Head of Marine & Cargo Insurance
18 years structuring marine cargo and trade insurance programs for exporters, importers, and freight forwarders across ASEAN and beyond.
Short answer
Trade credit insurance protects a seller's accounts receivable against buyer non-payment caused by insolvency or protracted default. The insurer assigns credit limits to each approved buyer, typically covers 90% of insured invoices, and pays claims within a defined waiting period — letting exporters sell on open account terms without carrying catastrophic buyer risk.
The Open Account Dilemma
Over 80% of world trade now settles on open account terms — goods shipped, invoice issued, payment due in 30 to 120 days. Buyers demand it; sellers who refuse lose orders to competitors who accept. But every open account invoice is an unsecured loan to the buyer, and recovery rates in cross-border insolvency routinely fall below 10 cents on the dollar.
Trade credit insurance resolves the dilemma: the seller keeps competitive open account terms while transferring the catastrophic risk — buyer insolvency and protracted default — to an insurer whose entire business is assessing and pricing buyer creditworthiness.
How a Policy Works in Practice
- 1The insured declares its buyer portfolio; the insurer underwrites credit limits for each approved buyer based on financial analysis and payment behavior.
- 2The seller ships on open account terms within approved limits and reports turnover — monthly or quarterly depending on policy structure.
- 3Premium is charged as a rate on insured turnover, typically 0.1% to 0.5% annually for domestic business and 0.3% to 1% for export business.
- 4If a buyer becomes insolvent or fails to pay beyond the waiting period (typically 90–180 days past due), the insurer indemnifies the insured — usually 90% of the invoice value.
- 5The insurer pursues recovery from the defaulted buyer and shares proceeds pro-rata with the insured.
What Is Covered — and What Is Not
| Covered | Not Covered |
|---|---|
| Buyer insolvency, bankruptcy, receivership | Trade disputes over quality or delivery (unless resolved in seller's favor) |
| Protracted default beyond the waiting period | Sales to buyers without approved credit limits |
| Political risk events (with political cover added): currency controls, import bans, war | Sales outside reported turnover or policy territory |
| Pre-shipment cover for goods in production (optional extension) | Fraud by the insured's own staff or agents |
The dispute exclusion deserves emphasis: credit insurance covers inability to pay, not refusal to pay over a commercial disagreement. A buyer contesting quality is a performance dispute, not a credit event — which is exactly why verification and inspection programs complement credit policies rather than duplicate them.
The Hidden Value: Credit Intelligence and Finance
Insurers maintain continuously updated files on tens of of millions of companies worldwide. Policyholders receive monitoring alerts when a buyer's creditworthiness deteriorates — often months before payment behavior changes — and limit decisions that function as an external credit department.
Insured receivables also become bankable: lenders routinely advance higher percentages against insured receivables, and many trade finance facilities require credit insurance as a condition. The policy simultaneously protects the balance sheet and unlocks working capital against it.
Who Should Carry Trade Credit Insurance
- Exporters selling on open account to new or concentrated buyers
- Manufacturers with receivables exceeding 20% of working capital in single customers
- Businesses entering emerging markets with limited buyer information
- Suppliers whose banks require receivable protection for financing lines
- Any seller for whom one buyer default would threaten solvency
Key takeaways
- Credit insurance covers buyer insolvency and protracted default — typically 90% of insured invoices.
- Credit limits per buyer are the operating core: ship within approved limits or lose cover.
- Disputes over quality or delivery are not credit events and are excluded.
- The policy doubles as a credit intelligence service and improves receivables financing terms.
- Premium typically runs 0.1%–1% of insured turnover depending on market and buyer risk.
Frequently asked questions
Trade credit insurance primarily covers commercial risks (insolvency, default). Export credit insurance extends cover to political risks — currency inconvertibility, import restrictions, war — on cross-border sales. Many export policies bundle both.
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