Articles September 15, 2021

On September 8, 2021, the Insurance Regulatory and Development Authority of India (IRDAI) issued new guidelines for trade credit insurance. These guidelines will come into effect on November 1, 2021, repealing the old norms of 2016. With these revised guidelines, IRDAI aims to promote the sustainable and healthy development of the trade credit insurance business and improve the economic condition.

As per the circular issued by IRDAI, all insurers involved in general insurance businesses (registered under the Insurance Act, 1938) except the ECGC Ltd. (formerly Export Credit Guarantee Corporation of India Ltd.) will be under the purview of these revised guidelines. Here, we will talk about revised guidelines issued by the IRDAI in detail. Let’s start by knowing what trade credit insurance is.

What is Trade Credit Insurance?

Trade Credit Insurance is an insurance product that covers businesses against the risk of non-payment for goods and services by buyers. A business transaction often happens based on credit and that’s why businesses always face the risk of non-payment. With trade credit insurance, businesses can get protection against the risk of buyers not paying them for the goods and services.

As per IRDAI, this insurance product covers a portfolio of buyers and indemnifies a definite percentage of an invoice/s that are unpaid due to extended default, insolvency or bankruptcy. With the new guidelines in effect, better trade will happen due to a lesser risk of payment defaults. Several general insurance companies offer trade credit insurance that covers suppliers, banks and other financial institutions against the country’s political risk and gives them access to new markets. They can also manage non-payment risks associated with trade finance portfolios.

Scope of Revised Guidelines for Trade Credit Insurance

With the revised guidelines, the scope of cover will mainly be the credit risk which has a direct link with an underlying trade transaction, the delivery of goods and services. However, if there is no such direct link, the trade credit insurance will not cover the outstanding amount.

With the revised guidelines, the insurance product might also cover commercial and political risks. Under the commercial risk front, the insurance product will cover insolvency or protracted default of the buyers of goods and services. Apart from this, the business will also get protection against rejection by the buyer after delivery as per the terms and conditions of the contract. The insurance cover will also include non-receipt of payments due to the collecting bank’s failure.

Coming to the political risk cover, it will be only available if the buyers are outside India and from countries agreed upon as per the IRDAI circular. Political risks include the following situations.

  • Occurrence of War
  • Hostilities
  • Civil War
  • Revolution
  • Insurrection
  • Any other disturbance in the buyer’s country

Note: The insurance policy will define the Maximum Liability Amount up to which the insurer will pay under a single policy as well as defined credit limits for each of the buyers.

Underwriting Requirements for Trade Credit Insurance

We are showing the underwriting requirements regarding this insurance below. Please check.

  • An insurer must have a board-approved underwriting and risk management policy.
  • This policy should cover the risk appetite for underwriting, such as exposure to a specific industry or sector, criteria and tools for credit assessment, etc.
  • The policy should also include a system to carry out stress tests on a regular interval, assess the impact on reserving and solvency needs, and plans to improve skills for internal underwriting, risk management and claims.

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