Irdai issues guidelines on trade credit insurance

Irdai today said an insurer should necessarily assess the credit risk of any buyer who contributes more than 2 per cent of the total turnover of the policyholder while revising guidelines regulating the credit insurance business.
The insurance regulator said that in the recent times, changes in economy, especially in micro, small, medium enterprise sector, have increased the need for trade credit and has enhanced the scope for the credit insurance sector, manifold.
Therefore, in order to give fillip to the growth of credit insurance market, Irdai said it is necessary to revisit the 2010 guidelines which regulate the credit insurance business in India.

"A trade credit insurance policy shall not be issued to banks/ financiers/ lenders... An insurer shall necessarily assess the credit risk of any buyer who contributes more than 2 per cent of the total turnover of the policyholder," said the revised guidelines.
Listing out the conditions for trade credit insurance, it further said a trade credit insurance policy should not be issued to banks, financiers or lenders.
"A trade credit insurance policy can be sold to seller on whole credit turnover basis only, covering all buyers.

"However, if the seller prefers to take credit insurance cover for a particular segment/product/or country, the same shall be allowed provided the cover is taken for the whole credit turnover of all buyers of that particular segment/ product or country," it said.

Also, a trade credit policy should not grant an indemnity of more than 85 per cent of the trade receivables from each buyer. A policyholder should be obliged under the policy to notify adverse information about the buyer to the insurer, said the guidelines which supersede the 2010 norms.
Trade credit insurance means insurance of suppliers against the risk of non-payment of goods or services by their buyers against non-payment as a result of insolvency.
Irdai also insurer should have internal risk management guidelines to assess "trade credit risk on the buyer, giving credit limits on the buyer and buyer credit limit review".