Meaning
A risk sharing arrangement specifies the percentage of a credit loss that a policyholder must pay alongside the insurer. In trade credit insurance, the co insurance retention defines the uninsured portion of each claim that the seller remains responsible for holding. It does not apply to losses covered under separate excess of loss clauses.
Policy Sharing
This commercial clause ensures that the policyholder maintains a financial interest in the creditworthiness of their buyers. The co insurance retention prevents the seller from extending reckless credit terms to high risk clients. It keeps the interests of the insured aligned with the standards of the underwriter.
Exposure Margin
The standard level of this self-insured percentage typically ranges between ten and twenty percent of the total invoice value. With the co insurance retention, the business absorbs a portion of every default directly. This structural boundary encourages thorough credit assessment.
Claim Distribution
When a customer default occurs, the insurance provider calculates the payout by subtracting the specified percentage from the total approved claim. The co insurance retention forces the seller to bear this immediate loss on their balance sheet. If a large buyer goes bankrupt, the business collects the majority of the debt but must write off the retained portion.
This structure manages the premium cost of the policy while ensuring the business maintains discipline in its daily credit reviews.
