IRDAI issues guidelines for trade credit insurance products

IRDAI has recently  issued draft guidelines for general insurance companies to come up with trade credit insurance products with customised covers for MSMEs and SMEs.

The latest guidelines will also enable general insurers to offer trade credit insurance covers to licensed banks and other financial institutions. These covers will help the financial institutions and companies manage their risks overseas, open up access to new markets and manage non-payment risks associated with trade financing portfolio. Trade credit insurance protects businesses against the risk of non-payment for goods and services by buyers.

As per IDRAI’s Trade Credit Insurance Guidelines 2021, the trade credit insurance can cover commercial as well as political risks, among others. The political risk cover will be available only to buyers outside India and countries agreed upon at the proposal stage. The commercial risks covered would include risk of insolvency or protracted default of a buyer or bank responsible for payment in case of letter of credit transactions, among others. A trade credit policy can grant an indemnity of maximum 60% of trade receivables from each buyer for all banks, financial institutions or factoring companies.

According to the guidelines, insurers can offer an indemnity of 90% of the trade receivables from each buyer for all policyholders other than banks, factoring companies, and financial institutions. But for MSMEs, the policy can cover 95% in case of political risks.

Sanjay Datta, Chief – Underwriting, Claims and Reinsurance, ICICI Lombard General Insurance, remarked, “The new draft guidelines on trade credit insurance issued by IRDA today envisage allowing banks, factoring companies and other financial institutions to buy credit insurance protection for their receivable financing programs. This will open up opportunities to offer credit insurance-backed financing solutions to MSMEs and large corporates. Other changes like enhanced indemnity of 90%, single buyer coverage for MSMEs and pre-shipment risk coverage will make the credit insurance product more comprehensive.”