Hyderabad: In an effort to improve economic stability by addressing business losses due to payment risks, the insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI), has issued revised guidelines for insurance trade credit that will take effect on November 1. 2021.
Trade credit insurance is a product that protects businesses against the risk of non-payment for goods and services by buyers.
It typically covers a portfolio of buyers and compensates an agreed percentage of an invoice that remains unpaid due to default, insolvency or bankruptcy.
The new guidelines will allow general insurance companies to offer commercial credit insurance with personalized coverages for suppliers, SMEs, MSMEs as well as banks, factoring companies and other financial institutions to manage the risk of non-payment associated with the commercial finance portfolio.
The scope of the trade credit insurance policy is the credit risk that has a direct link with an underlying business transaction, which is the delivery of goods or services. It will cover both commercial and political risks.
From a business risk perspective, these policies will cover the insolvency or protracted default of buyers of goods and services. These policies will also cover rejection by the buyer after delivery, subject to the terms of the contract.
It will also cover the political risk in case of buyers outside India and with regard to the agreed countries. It will cover situations such as the occurrence of war, hostilities, revolution, insurgency or other unrest in the buyer’s country.
The policy will define the âmaximum amount of liability,â which is the maximum loss that can be paid under a single policy along with well-defined credit limits for each of the buyers.