Managing Trade Credit Insurance Deductibles and Uninsured Exposure
Manage trade credit retentions by haircuts on borrowing bases, strict discretionary limit compliance, and funding self-insurance from gross margin.
Co-Insurance
Meaning
Risk sharing provision where the policyholder and the insurer agree to divide every loss according to a fixed percentage. This co-insurance arrangement ensures that the insured party retains a direct financial interest in the quality of their credit management and the outcome of collection efforts. The insurer typically covers a large portion of the loss while the policyholder bears the remaining percentage.
It is a standard feature in commercial credit insurance and property insurance policies.
Loss Partition
When a claim is filed, the total amount of the valid loss is multiplied by the agreed percentage to determine the payment. For example, if a policy features ninety percent co-insurance and a customer defaults on a ten thousand dollar invoice, the insurer pays nine thousand dollars. The policyholder absorbs the remaining one thousand dollars as their own loss.
Economic Incentive
Requiring the insured to pay a part of every claim prevents the moral hazard of granting credit too freely. Because the co-insurance requirement applies to every transaction, the policyholder is motivated to perform thorough due diligence on all buyers. This shared risk ensures that the interests of the business and the insurer remain aligned throughout the policy term.
Policy Condition
Compliance with the terms of the contract often depends on the insured maintaining a specific level of insurance relative to the total value of the assets. If the policyholder fails to insure the full value required, the co-insurance clause may reduce the claim payment proportionately. This penalty ensures that the insurer receives a premium that is fair for the total risk being covered.
The percentage of risk retained by the insured can be adjusted to lower the annual premium cost.