Terminology peculiar to insurance can be difficult to understand, particularly since certain words are given completely different meanings to those attaching to them during everyday usage. Please discuss any questions relating to any insurance related terminology with us.
Certain duties relating to the running of your insurance arrangements are imposed by law and others are created by the Insurance Contract. The following also explains certain procedures involved in complying with such requirements and also provide some background information which should enhance your understanding of them.
Types of Credit Insurance cover available
Catastrophe Cover
A policy designed to protect only against a very large unforeseen loss. Typically carries a large deductible.
Datum Line Policy (Key Account)
Covers top buyers above a pre-determined level (the datum line). Once they have reached that level, they remain insured even though the amount owed at time of loss may subsequently fall below the datum line. This policy ensures that once a buyers business grows to a significant size, it becomes insured.
Domestic Sales cover
This cover is provided on a whole turnover basis for buyers in United Kingdom.
Export Policy
Also provided on a whole turnover basis but the UK is excluded. Political cover can be included.
Principal Customer / Top Trader
Covering up to a maximum of 20 top named buyers.
Specific Account
Covers a named buyer for turnover during a 12 month period.
Specific Contract
Covers a specific contract and is usually subject to a minimum contract value.
Whole Turnover Policy
The most common and usually the most cost effective and beneficial, protecting all insurable sales under one policy.
Work in progress cover
Cover against the Insolvency of a buyer during the time when goods are in production. The claim is generally for the variable cost of labour and materials incurred at the time the loss occurs. WIP is added to a standard policy by special endorsement for additional premium.
Other variations are available and indemnity can be anything from 75% to 100%.
Credit Insurance Glossary
Administration Fees
A charge to defray the cost of managing a policy. It may be included in the premium cost or charged separately.
AFL – Aggregate First Loss
The most common form of deductible. The sum of all insured losses must exceed a specified amount before a claim is paid.
Approved Limit
The amount of credit agreed by the insurer for a specific buyer.
Assignee
A financial institution or other company designated by the Insured to receive the benefits of the policy.
Associated Company
A company that is not dealt with at arms length. There is usually overlapping management or common shareholders.
Back Sales
Coverage on sales made prior to the Inception Date of the policy.
Bank Report
A form provided by a bank giving a general indication of its clients credit worthiness. Generally includes length of relationship, magnitude of borrowing facility, and nature of their dealings (satisfactory or otherwise)
Bankrupt
A company that a court has determined is unable to meet its obligations, and has ordered its assets be distributed to the benefit of its creditors.
Buyer (also known as Debtor)
A company to whom the Insured sells goods or services.
Collection Company
A company whose business is pursuing overdue accounts on behalf of a vendor. Its fee is usually on a success only basis.
Confirmed Letter of Credit
A letter of credit where another bank guarantees the payment obligation of the issuing bank.
Construed Cover
Where an insurer cancels cover on further shipments (usually due to severe financial deterioration of the buyer), the insured may still be covered on new shipments if it has bought construed cover. It enables the Insured to finish supplying an existing order and therefore avoid absorbing the cost of unshipped inventory.
CWP – Country Waiting Period
A period of time after the due date before which a loss is deemed to occur, normally expressed in days. The purpose is to recognise the normal payment patterns of various countries, and to protect the insured should this pattern deteriorate.
Credit Limit
The amount of credit an Insured establishes as suitable for a buyer.
DSO – Day Sales Outstanding
The average number of days it takes a company to collect its accounts. DSO's vary by industry, and are carefully monitored to identify credit deterioration and ensure effective use of cash flow.
Deductible
An amount deducted from a loss. Standard types include: Each and Every (E&E), Aggregate First Loss (AFL) and Minimum Retention (MR)
Discretionary Credit Limit
The size of credit limit the Insured may approve provided it adheres to the credit steps set out in the policy.
Due Date
The date on which an invoice is due for payment.
E&E – Each and Every
The insured bears for his own account a fixed sum i.e the individual first loss plus the insured % of the balance of the debt.
Factoring
The selling of invoices at a discount to face value to a third party.
First Loss
The amount of loss that is retained by the Insured, usually through some form of deductible.
Indemnity
The percentage of the insured loss which is covered by the insurer, normally 80% to 90%. The remaining percentage is retained by the insured.
Insolvent
A company with insufficient cash to pay its obligations when due.
Joint Insured
Another company named to the policy as an insured. Often an associated company with common credit management.
Letter of Credit (Documentary)
An obligation of a bank (usually selected by the buyer), to pay the seller upon presentation of specified documents which reflect the agreed terms of sale.
Liquidation
The sale and distribution of a company's assets for the benefit of it's creditors.
MEP – Maximum Extension Period
The period of time for which the Insured may postpone the original due date of an invoice without notifying the Insurer. The extension should be given to the buyer on or before the original due date, and be in writing.
Maximum Liability
The maximum amount an Insurer will pay under a policy.
MR – Minimum Retention
A form of deductible. The minimum retention or Indemnity will be used to decide on the contribution towards a claim. Whichever is highest.
NQL – Non Qualifying Loss
A claim must be at least this amount before the Insurer will process it. Amounts smaller than the NQL are not credited to the AFL. The NQL is used to keep premium costs down by removing small claims.
Protracted Default
Non-Payment of an account after a specified period beyond the due date.
Unsecured Creditor
A creditor who has no claim on any specific asset of the debtor
Winding up order
A court ordered liquidation of a company's assets.
