Credit insurance covers the policyholder’s interests in the event of a borrower’s insolvency or dishonesty (deliberate non-payment) and the potential loss the creditor may suffer. These are universally known as payment protection insurance or credit default insurance.
After the contract stated risk occurs, the insurer shall undertake the contract of insurance premium to compensate its insured losses, according to the agreed amount of damages. The term credit is derived from the elements between the supply of goods from one company to another or the provision of a service and payment for a given period of time (usually 30-180 days).
The commercial risks primarily include the buyer’s insolvency (bankruptcy). In addition, significant risk factors are changes in the foreign exchange transactions as well as others that have a negative impact on commercial relations.
The political risk factors include political unrest, massive strikes, a coup d’etat, not covered by government action to declare a ban (an embargo) or suspensions (moratoria) on exports, imports, and other commercial activities.
Any company that delivers a product or provide a service on account, must protect itself against the risk of unpaid claims. And these are capable of causing liquidity constraints, which depending on the level of outstanding debt can rapidly lead to financial problems of a company. The credit does not only claim compensation for a loss, but also the credit rating of declining business at home and abroad.
In credit insurance, the forms trade credit, are secured by receivables from goods and services, and capital goods credit insurance vary. Political risks can be secured through export credit guarantees.
For the broader sphere of credit insurance among consumers, differs only to banks, for example, in hedging against MRP or installment loans from individuals.
It has in times of increasing unemployment, an implication due to the corresponding increase in judicial decisions in this segment. In this extended environment, the deposit insurance settles, which is similar to a bank guarantee.
Credit insurance was launched for the purposes of issuing specialized insurance. The objective was to combine the product lines of business credit insurance, surety insurance and fidelity insurance, which were previously offered occasionally by large insurance companies, to companies to provide competent protection against liquidity shortages.
Consumer credit insurance is a means for consumers to cover the liquidation of loans, such that even if the debtor passes away, incapacitated, or loses a job, the debt can still be repaid.