Content area
Full text
There's been a lot of discussion lately within the U.S. trade credit insurance market about the difference between so-called "cancelable" and "non-cancelable" trade credit limits. Trade credit insurance, of course, is the protection provided by an insurance company against a loss that may be suffered by the policyholder when, having sold a product or service on credit terms, the policyholder's customer defaults in its repayment obligation. The trade credit limit is the amount of loss that the insurer will reimburse to the policyholder (prior to any coinsurance or deductible) for a specific customer.
Long viewed as separate yet ordinary features of the trade credit insurance landscape, the distinction between cancelable and non-cancelable forms of coverage hit center stage during the financial crisis several years ago. Throughout that period, some policyholders with cancelable limit-type policies experienced withdrawals of some of their trade credit limits. Although withdrawals had always been a possibility under the terms of these policies, and while some policyholders had previously seen isolated withdrawals, the relatively large number of withdrawals that took place during the crisis was unusual.
Among the reactions to this credit limit withdrawal exercise was a decision by some to investigate coverage options under a non-cancelable format. Reasonable enough. But a business decision of this sort merits careful consideration of the differences between the products and why some limits are withdrawn in the first place.
An important point to know is that a number of trade credit insurance companies offer both cancelable and non-cancelable limit-type products. So, the distinction is not necessarily one of insurance company but of product offering. Both products have been sold successfully in the United States for many years and, in...