The Insurance Regulatory and Development Authority of India (IRDAI) recently updated its policies for trade credit insurance. This update comes with various components such as the what, who, and why of trade credit insurance, its coverage and applicability, and the benefits that are expected to be seen from these changes.
About Trade Credit Insurance
Trade credit insurance is a tool that protects businesses from the potential risk of non-payment for goods and services they provide. Usually, this type of insurance covers a group of buyers and promises to compensate for a set percentage of an invoice or invoices that go unpaid due to excessive delay in payment or insolvency.
This tool helps in the overall economic growth of a country by promoting trade, and it enhances economic stability by confronting payment risks causing trade losses.
Range of Coverage
The reach of trade credit insurance is wide, extending to sellers or suppliers of goods and services, factoring companies as recognized under the Factoring Regulation Act 2011, and banks and financial institutions.
For the latter two – banks, financial institutions, and factoring companies – it provides a safety net against loss due to non-receipt of payment from a buyer subjected to commercial or political risks. This implies the purchase or discounting of bills and invoices is covered.
Commercial risks include a long-standing default or bankruptcy of the buyer, rejection after delivery subject to contractual conditions, and rejection before shipment and non-payment resulting from the collecting bank’s failure. Political risk coverage is a provision only applicable to foreign buyers and includes a range of situations such as wars and socio-political instability in the buyer’s country.
Applicability of the Guidelines
The newly revised guidelines apply to all insurers dealing with general insurance businesses, registered under the Insurance Act enacted in 1938. The only exception to this rule is ECGC Ltd (formerly known as Export Credit Guarantee Corporation of India Ltd).
Anticipated Benefits
The IRDAI’s recent move is expected to bring numerous benefits. By allowing general insurance companies to assist businesses in managing country risk, new markets may be opened up and non-payment risk linked with trade financing portfolios can be expertly managed.
Another significant outcome is the potential for general insurance companies to provide trade credit insurance with custom-tailored covers, which is aimed to boost businesses for Micro, Small and Medium Enterprises (MSMEs). Given the fluctuating insurance risk needs of these enterprises, this change could present them with a much-needed safety net.