Credit insurance (kreditforsikring)
Also known as trade credit insurance, receivables insurance, debtor insurance
Credit insurance covers the loss if a customer does not pay — a policy on the sales ledger, where a known premium takes the place of an unknown write-down.
- Covers
- Losses on approved debtors
- Premium depends on
- Portfolio and risk
- Requires
- An approved limit per customer
In practice
Credit insurance moves the risk of loss off your own balance sheet. The insurer assesses your customers, sets an approved limit for each of them, and covers an agreed share of the loss if an approved debtor fails to pay.
What it buys is predictability. A company with a handful of large customers carries a concentration risk that no amount of receivables work can remove: if the biggest customer goes under, the loss is there however promptly the reminders went out. Insurance turns precisely that loss into something you can budget for.
The insurer’s ongoing assessment is also information in its own right. If the limit on a customer is cut, or cover is withdrawn altogether, that is a judgement from someone with their own money at stake — and it usually arrives before the invoice falls due.
Where it commonly goes wrong
- Cover is assumed to be complete. Policies carry an excess, a percentage of cover and a limit per debtor. Deliver beyond the approved limit and the excess amount is your own.
- The limits are not kept current. Cover follows the limits the insurer had approved at the time of delivery. A customer growing faster than their limit is only partly covered.
- Notification deadlines are missed. A policy sets deadlines for reporting non-payment. Report the loss too late and cover can fall away, even when everything else is in order.