2016

Credit Insurance: Master Policy or Individual Insurance? A Lender’s Options

Credit insurance is a useful tool to protect a lender’s interests, but choosing whether to place a client under a master policy or take out an individual policy tailored to the client is a critical decision. Lauren Saglamer examines both choices to help lenders make the best choice to mitigate risk.



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Lauren Saglamer, Vice President of Operations, FGI

Credit insurance is a useful risk mitigation tool that lenders can use to protect their clients’ accounts receivable against potential losses. It can hedge risk for businesses of any size across a variety of industries and for those borrowing both domestically and internationally. While some clients might consider insurance an unnecessary additional expense, it is often more cost effective than hiring in-house underwriters, and the potential recovery value the policy holds could prove immeasurable.

Credit insurance comes in an array of fully customizable policy options. However, the first and most critical decision for a lender to make is whether to place its client under an already-established credit insurance policy in the lender’s name, which serves as a consolidated master program to underwrite multiple clients at once or to purchase an individual credit insurance policy in the client’s own name. Here we will draw a side-by-side comparison to examine the merits and drawbacks of each policy option.

Insurance carriers have the ability to craft policies tailored to the specific needs of their clients. Individual policies are more flexible, with their focus on underwriting a single client and any of its niche business practices, while master policies are not designed to be so finely tuned. A master policy works best for a group of clients with more basic needs, not necessarily in the same industry or location, but those that can be insured under a similar policy structure, with more general language and declarations. As risk is highly dynamic and influenced by countless factors, having the option to purchase a policy with a higher level of detail can be invaluable.

Master Easy to Manage

The lender’s master policy is easier to manage administratively. Since the policy already exists and is in force, placing a client under the master policy means one less negotiation between the carrier and the lender. The process of purchasing an individual policy calls for its own, often lengthy and tedious, negotiation costing both the carrier and lender precious time and effort to perfect the policy language, agree upon pricing and finalize underwriting. Using the master policy means the carriers have less due diligence to perform, as any new additions will fall under the already established structure. This also means there is one less policy for both the carrier and lender to monitor for compliance purposes. In order to file and ultimately get paid on a claim, a lender is responsible for submitting certain items to the carrier throughout the policy period. Each of these items, such as a report of receivables that are past due, often must be submitted by certain deadlines and within certain parameters. An individual policy forces a lender to keep track of an additional reporting requirement.

Cost is a critical in deciding which type of policy to use. Insurance premiums are typically dictated by coverage, or the amount of sales insured under the policy. The lender is required to report the full amount of sales for each insured buyer, regardless of the amount of insurance actually offered against the buyer. Master policies can allow for a “pay-as-you-go” structure, under which premiums are based on the client’s reported sales for a specific period of time. Under individual policies, premiums are usually predetermined by a client’s projected sales for the policy period. If a client under its own policy has inadvertently overestimated its forecasted sales for the year and falls short of its target, the client is still responsible for paying the already contracted premium. Similarly, a conservative sales projection could subject the client to a “true-up” of its policy, in which case the client would be required to pay additional premium for the insured sales that exceeded the client’s original projection.

Time is Money

Occasionally, the cost benefit is derived from saving time not actual cash. The shopping process for individual policies requires a lender to gather, compare and evaluate competing quotes from multiple carriers. The master policy only needs to go through this process once; as soon as the policy is signed it is available for the lender to add to at any time. The lender must be careful to avoid inadvertently forgoing a more preferable deal for its client due to the attractiveness of the easy implementation process of the master policy.

It is the lender’s task ultimately to decide which policy option will best safeguard its client against the most risk. The combination of factors examined here, such as the customization of each policy, potential cost, ease of administration and management, and each policy’s underwriting flexibility will certainly contribute to the lender’s decision. However, the insurance offered under either policy is meant to yield the same result: to maximize recovery against losses if the policy is exercised. Whether this calls for placing a client under the lender’s own master policy or purchasing an individual policy in the client’s name, being armed with the information about these options in the insurance market is the lender’s first step toward adding an additional layer of risk mitigation to its lending facilities.