One of the main benefits of contracting a Credit Insurance policy is the recovery of losses caused by defaulting clients. But how can one calculate the indemnity to be paid by the Insurer after a loss has been assessed?
Insureds are very likely to confuse the application of Credit Insurance deductibles with the application of deductibles under other lines of insurance when calculating the value of an indemnity. But this calculation is much simpler than it appears.
Credit Insurance policies require an obligatory participation by the Insured in all cases. Therefore, most of the times, the insurer covers 90% of the risk, and the insured absorbs the remaining 10%.
This percentage is applied to the credit limit approved by the Insurer for the buyer or to the debtor balance as at the time of the loss, whichever is the lesser. Another important point to consider is that, in all instances, the indemnity is assessed with basis on the face value of the invoices, without consideration being given to interest, fines or monetary correction.
Let’s do two calculations for exemplification purposes:
The insurer approved a credit limit of R$ 1,000,000.00 for the buyer.
The balance of the Insured’s accounts receivable for the buyer on the date the loss was identified, was R$ 950,000.00.
Thus, the indemnity value payable to the insured was R$ 855,000.00 (i.e., R$ 950,000.00 x 90%).
The buyer has a R$ 500,000.00 credit limit and, on the date of the loss, the value of the balance to be received from the insured company amounts to R$ 800.000,00. In this scenario, the indemnity payable to the insured will correspond to R$ 450,000.00 (R$ 500,000.00 x 90%).
It is important to point out that regardless of the amount to be indemnified, the insurer will handle the collection of the full amount of the debt. Thus, presuming the debtor balance is fully recovered, the Insured will also receive 100% of the debt owed to him.
Each Credit Insurance policy is written with specific terms to meet the needs and particularities of each company and sector. Therefore, should you have any doubts concerning your insurance contract, CredRisk Insurances is at your disposal to assist you.