The Advantages and Disadvantages of Purchasing Commercial Credit Risk Insurance

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Date Submitted: 06/22/2011 11:46 AM

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The Advantages and Disadvantages of Purchasing Commercial Credit Risk Insurance

One of the few tangible assets on the International Manufacturing Company Balance Sheet that is not insured is Accounts Receivable. One method of securing Receivables is by domestic and international credit insurance. A credit insurance policy is designed to protect a company's Accounts Receivable from catastrophic credit losses. Credit insurance may offer a variety of options to International Manufacturing Company, including insurance for:

 Domestic and foreign accounts.

 Foreign accounts only.

 Only certain customers over a specific dollar exposure.

 Specific key customers only.

Purchasing business credit insurance can substantially reduce the risk of exposure to customer non-payment, and an accompanying bad debt write off. Commercial credit risk coverage can be written to cover International Manufacturing Company’s entire customer base, or it may be targeted to cover only certain specific customers or types of customers – such as API Pipe customers or Tubular customers only. A domestic credit insurance policy (in contrast to an export credit insurance policy) covers only "commercial risks."

Commercial risks can be thought of as events generally within the control of buyers and may include (depending on the specific terms of the domestic credit insurance policy):

 The buyer's insolvency or bankruptcy.

 The buyer’s inability to pay for financial reasons.

 Protracted payment default: An unwillingness to pay for goods received.

 Repudiation of the shipment - when the buyer fails or refuses to take delivery of goods.

 Pre-credit risk; which is the risk related to losses caused by a buyer's insolvency during the manufacturing period but before delivery of the goods or completion of contract.

These problems could occur for many reasons, such as fluctuations in demand, natural disasters, or general economic conditions in our customer's industry.

Any type...