IRDAI Guidelines on Trade Credit Insurance

The Insurance Regulatory and Development Authority of India (IRDAI) recently issued draft guidelines for general insurance companies. The guidelines mainly focus on credit insurance products with customised covers for MSMEs.

Guidelines on Trade Credit Insurance

  • The guidelines will enable general insurers to offer trade insurance covers to financial institutions (mainly licensed banks). This will help companies manage their risks overseas, manage non-payment risks associated with trade financing portfolio and open up access to new markets.
  • The trade credit insurance that has now been introduced with the new guidelines will protect the businesses against the risk of non-payment of goods and services by the buyers.
  • According to the guidelines, the trade credit insurance can cover commercial and political risks as well. However, the option of political risk is available only to buyers outside India. But still, for MSMEs the policy can cover 95% in case of political risks. The commercial risk covers risk of insolvency as well.
  • A Trade Credit policy can grant an indemnity of maximum 60% of trade receivables from each buyer for all financial institutions. Indemnity is the security or protection against a loss or other financial burden.

Significance

The new guidelines will open up opportunities to offer credit insurance-backed financing solutions to corporates and MSMEs. Also, changes such as enhanced indemnity of 90% and pre-shipment risk coverage will make the credit insurance product more comprehensive.

What is Credit Insurance?

Credit Insurance is an insurance policy that is designed to cover the cost of the debt. It is purchased by a borrower that pays off one or more existing debts in case of death or unemployment. It protects businesses from non-payment of commercial debt. It ensures that the capital is protected.

The three main types of credit insurance are disability, life and unemployment.

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