Trade Credit Insurance — Protecting Receivables Against Buyer Default (No Derecognition)

💡 Accountant's Note

Trade credit insurance (provided by Euler Hermes/Allianz Trade, Atradius, COFACE, Zurich Trade Credit, AIG) protects a company's accounts receivable against buyer insolvency or protracted default. The insurer typically covers 70–90% of the approved credit limit for each buyer. Unlike factoring (which transfers the receivable), credit insurance RETAINS the receivable on the seller's balance sheet — the insurance merely creates a contingent recovery right. Premium: typically 0.1–0.5% of insured turnover annually (the sum of all credit-insured sales). For $285M in insured sales at 0.1%: $285,000 annual premium. The premium is prepaid and recognized ratably over the policy year. Policy mechanics: (1) The seller obtains a credit limit for each buyer from the insurer, (2) If the buyer defaults, the seller makes a claim (with documentation of the unpaid amount and the buyer's default), (3) The insurer pays the claim (typically 70–90% of the unpaid amount) after a waiting period (60–90 days post-due). The insurance recovery is recognized only when the claim is approved — NOT when the loss first occurs.