What Is Accounts Receivable Insurance and How Does It Work?

Accounts receivable insurance protects businesses from customer non-payment, helping maintain financial stability despite unexpected defaults.

Coverage Types

Accounts receivable insurance provides several coverage options tailored to business needs. Whole turnover coverage insures all receivables, offering broad protection and simplifying administration. This option suits businesses with high transaction volumes.

Named buyer coverage focuses on specific high-risk customers or accounts, allowing businesses to insure receivables that most threaten cash flow. For instance, a company might insure receivables from a new international client with an uncertain payment history to mitigate potential losses.

Single-buyer coverage protects transactions with one customer, benefiting businesses reliant on a few key clients. Insuring these critical accounts helps safeguard financial stability and supports confident planning.

Eligibility Factors

To qualify for accounts receivable insurance, businesses must demonstrate financial health. A strong financial statement, including liquidity ratios like current and quick ratios, shows the ability to manage receivables and short-term obligations.

The creditworthiness of customers is equally important. Insurers may review credit reports or payment histories of major clients to assess default risks. Companies with diverse customer bases and consistent payment histories are viewed more favorably, while those with concentrated or high-risk clients may face stricter terms or higher premiums.

The industry and geographic location also influence eligibility. Sectors like construction or retail may be deemed higher risk due to economic volatility or longer payment cycles. International transactions can add complexity, requiring additional documentation or conditions.

Underwriting Considerations

Insurers assess several factors when underwriting accounts receivable insurance. Key considerations include the historical performance of receivables, such as the average collection period and trends in overdue accounts. A shorter collection period often signals lower risk and efficient credit management.

Internal credit policies are also scrutinized. Underwriters examine how credit limits are set, monitored, and enforced, as well as how overdue accounts are managed. Companies with strong credit controls and dedicated credit management teams are more likely to receive favorable terms.

Economic conditions and industry trends also play a role. Insurers evaluate macroeconomic indicators like GDP growth or consumer confidence, which may impact the insured’s sector. Regulatory changes, such as updates to accounting guidelines, can further influence underwriting decisions.

Contractual Terms

Contractual terms outline the scope, obligations, and limitations of accounts receivable insurance. The policy limit specifies the maximum payout, often set as a percentage of total receivables, typically between 75% and 90%.

Deductibles represent the portion of a loss the insured must cover before the insurer pays. These may be a fixed amount or percentage of the claim. Higher deductibles can reduce premiums, which may appeal to businesses confident in their receivables management.

Claims Requirements

Filing a claim requires adherence to specific procedures and documentation. Insurers typically require notification of a payment default within 30 to 90 days. Missing this deadline can result in denial.

Key documentation includes invoices, proof of delivery, customer correspondence, and evidence of collection efforts. Third-party collection reports and the original credit agreement may also be required to confirm the claim aligns with policy terms.

Insurers review claims to verify legitimacy and calculate payouts, considering the insured’s compliance with policy conditions, such as maintaining proper credit controls. Approved claims are usually paid within 30 to 60 days, helping businesses stabilize operations.