Alternatives to traditional credit insurance limits

In the current economic climate, the traditional credit insurers are all reducing their exposures. This forces us to look at alternatives available to clients to protect them against non-payment from clients. Specially to support clients that rely on bank funding who in turn require insurance to support the limit.

Single Debtor insurance and Payment Guarantees offer similar protection to traditional credit insurance but could be obtained for a single risk. Underwriting still takes place and the insurer requires relevant supporting documents for this purpose. This should not be seen as an alternative solution to obtain cover on “bad risks” but as an alternative where your primary insurer has reached their capacity or where you don’t have access to a full book insurance policy.

Single Debtor Insurance

A credit insurance policy supporting a single buyer. The policy holder would be the supplier/creditor and premium is paid by the policy holder. The policy has a minimum period of 4 months but could be extended to fit your requirements. Premium is calculated based on the limit issued and ranges between 0.25% and 2% per month (3% - 24% pa) depending on the credit quality of the debtor.

In a default event, the policy holder would need to prove their claim against the insurer subject to compliance of the terms and conditions of the policy. There is also a waiting period before the claim is paid to allow some time for the insurer to try and collect the debt from the buyer.

Single Debtor cover is available for both local and foreign buyers.

Payment Guarantees

A payment guarantee is similar to Single Buyer Insurance in that it covers a single risk. The debtor/buyer contracts with the Guarantee provider and pays the premium. The creditor/supplier is issued with a Payment Guarantee. The major difference is that a guarantee is an on-demand negotiable instrument and no waiting period applies to a claim. Premium is calculated as a percentage of the value of the guarantees issued and is payable by the debtor (In some cases, the insurer may allow the supplier to pay the guarantee premium). Premium ranges between 3% and 6% per annum and depends on the credit quality of the debtor.

Such guarantees generally run up to the final scheduled date of payment and include a grace period to allow the beneficiary to make demands in the event of non-payment.

Payment guarantees enhance the supplier’s credit risk and be used as top-up collateral for credit insurance limits where capacity is a problem. Maximum value of the guarantee facility is R20 million with a maximum of R5 million guarantee issued per supplier.

The debtor/buyer must be domiciled in South Africa, the creditor/supplier could be elsewhere. However, the supplier would need to agree to accept the guarantee issued.

Who would typically make use of Single Debtor Insurance or Payment Guarantees?

  • Any supplier or creditor that under normal circumstances does not make use of credit insurance to protect their balance sheet.
  • Any supplier or creditor that makes use of credit insurance but whose primary insurer is unable to support the limit due to capacity constraints.
  • Any supplier or creditor that is required to obtain some form of collateral from their debtors as a pre-condition from their bankers that provides funding on the back of their account receivables.
  • Any debtor or buyer that is required to provide some form of collateral to their suppliers in return for a credit facility.

If you are interested in exploring either of these alternatives in more detail, please contact your Cinque advisor.