Trade Credit Insurance (TCI) Definition

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Trade Credit Insurance (TCI) Definition

Trade credit insurance (TCI) is a technique of safeguarding a firm against the inability of its commercial clients to pay for goods or services, whether due to bankruptcy, insolvency, or political instability in the country where the trade partner operates.

TCI, also known as accounts receivable insurance, debtor insurance, or export credit insurance, assists firms in protecting their capital and stabilizing cash flows. It may also assist companies in obtaining better financing conditions from banks that are certain that their clients’ accounts receivable will be reimbursed.

Key Takeaways

  • Trade credit insurance (TCI) compensates businesses when their clients are unable to pay due to bankruptcy or unstable political situations.
  • Insurers often price their policies depending on the size and number of consumers covered by the policy, the creditworthiness of the clients, and the risk inherent in the industry in which they operate.
  • Companies may opt to indemnify all of their customers, a select set of buyers, or even just one trade partner.
  • Businesses that want to reduce their credit risk may also self-insure, however this can be more costly, particularly for smaller enterprises with fewer buyers.

What Is Trade Credit Insurance (TCI)?

Many business purchasers ask for credit to make substantial purchases of products or services, but financing to such clients puts a supplier at risk of not being reimbursed. If, for example, the client declares bankruptcy, the creditor is typically only paid a part of what is due, if at all. This is particularly true for unsecured loans, when the creditor lacks security to back up the loan.

TCI reduces this risk by paying policyholders for outstanding debts up to the appropriate coverage limits. One of the benefits of TCI is that businesses may securely provide credit to new or current clients, knowing that they will be paid back regardless of the customer’s financial situation. As a result, insurance may assist businesses in expanding without taking unnecessary risks.

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Carriers like as AIG, Zurich Insurance Group, Chubb, Coface, Allianz Trade, and Atradius are among the main TCI providers. The Export-Import Bank of the United States (EXIM), the country’s official export credit agency, also offers credit insurance to safeguard overseas receivables from bankruptcy and political risk. If the customer fails to pay, businesses insured via EXIM earn 85% to 95% of the invoice amount.

How Trade Credit Insurance Works

The cost, like any other insurance product, reflects the predicted risk that the policyholder provides to the insurer. When assessing a company’s risk, insurers consider a number of factors, including the amount of transactions it conducts, the creditworthiness of its purchasers, the sector in which it works, and the payback conditions agreed upon by buyers. According to Meridian Finance Group, a specialized insurance agency, coverage often costs less than 1% of the covered sales volume.

Insurance coverage for businesses may often be scaled to meet their budget and risk profile. For example, they may have the choice of covering a single customer (especially if the account is big or highly dangerous) or a limited number of clients. Some plans additionally provide supplementary coverage, which kicks in only if the original insurance fails to pay the whole amount of a claim.

Insurance companies often issue a credit limit to each of a client’s insured trade partners based on their financial status. If the buyer fails to pay for products or services, the insurer will only cover damages up to the amount of the indemnity.

Though some carriers include nonpayment due to trade embargoes or other government-related events in their TCI coverage, other insurers provide political risk insurance as a distinct product. Such safeguards are particularly critical for multinational enterprises and huge hospitality chains that operate in typically difficult locations.

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Advantages of TCI

For certain businesses, the ability to provide favorable loan terms to purchasers might attract bigger buyers or open the door to prospective regional development. TCI makes firms more comfortable granting loans since the danger of default is greatly reduced. In sectors where the majority of the big rivals already carry TCI, adopting a loss-mitigation plan may be required just to remain competitive.

Offering higher credit limits to purchasers also aids businesses in achieving economies of scale. Because clients may purchase bigger quantities, a business may find itself buying larger quantities from its own suppliers, allowing it to negotiate better prices.

Alternatives to TCI

TCI isn’t the only alternative available to businesses concerned about receivables loss. Here are three further options.


One option is to self-insure, which implies that the company establishes its own reserve money particularly to cover losses from delinquent customers. The disadvantage of this technique is that a corporation may have to put aside significant resources for loss prevention rather than utilizing that money to build the business.

Third-party Factors

Another option for businesses is to sell their receivable accounts to a third party known as a factor, who will then seek to collect the receivables on their behalf. A factor, on the other hand, frequently obtains the right to such receivables at a significant discount—commonly 70% to 90% of the billed amount. The creditor may obtain a higher proportion if the factor collects the whole amount, but it must still pay a significant charge for the factor’s services.

Buyer’s Letter of Credit

Finally, organizations doing business in other countries may receive a letter of credit from the buyer. It is essentially an assurance from the bank of the acquiring firm that the seller will be paid in full by a particular date. One disadvantage is that they may only be acquired and paid for by the buyer, who may be unwilling to pay the transaction charge in exchange for the bank’s guarantee. Furthermore, the letter of credit only applies to one customer, placing the supplier in charge of protecting its other receivables.


Growth of TCI Market

According to Allied Market Research’s 2021 research, TCI adoption surged during the 2020 economic slump, which served as a reminder of the possibility for market disruption and lost receivable income. According to the research firm’s estimations, the worldwide market for TCI reached $9.39 billion in 2019 and is predicted to reach $18.14 billion by 2027. This equates to an annual compound growth rate of 8.6%.

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