What a trade credit policy sells is not first an indemnity, it is an opinion on each of your buyers, revised continuously. The insurer grants a guaranteed limit per buyer: below it the receivable is covered, above it it is not. The master contract sets the rules, but the limits are the product, and that is where most of what an exporter buys is decided. An insured who has read the contract without looking at the state of its limits has not read its cover.
Those limits are revised without you, and that is as much their value as their difficulty. The insurer follows buyer solvency continuously, and it sees what the exporter cannot: it also insures the same buyer's other suppliers, so it knows before you do that a payment is stretching elsewhere, that a limit was requested and declined, that an incident was reported. This asymmetry of information is a considerable part of what is being paid for, alongside the indemnity itself. It also explains why the insurer is not always free to give reasons: the reason often belongs to another insured.
Not every limit is applied for, and the distinction has a name worth knowing. Above a threshold set in the contract, each buyer must be the subject of a named application, which the insurer approves, reduces or declines: that is buyer approval, and it is explicit. Below that threshold, the policy generally leaves the insured a framed discretion, on condition that it follows a verification procedure defined in the contract, payment incidents included. That second category is where claims surprise people, because the insured believes it is covered automatically when it is covered conditionally, and the condition is a diligence it owed itself. The first reflex on an unpaid receivable is therefore to check which side of the threshold the buyer sat on.
Withdrawal of a limit is the hardest moment in the relationship, and it should be understood before it is lived through. Reducing or withdrawing a limit does not, as a rule, cancel cover on receivables already created: it stops cover on what has not yet shipped. The exporter therefore learns that its insurer no longer believes in a buyer at the precise moment it has an accepted order, goods ready, and a commercial relationship to protect. Three clauses then decide the file far more than the headline rate: the notice given on a reduction, the treatment of shipments in transit, and the effective date of the withdrawal.
What the exporter can do at that moment is countable: ship uncovered and carry the risk itself, require a documentary credit or a bank guarantee that shifts the debtor, shrink shipments to stay under the residual limit, or stop. What it cannot do is treat the withdrawal as an opinion to be argued with. The insurer is not required to persuade, and the exporter who spends three weeks pleading loses exactly the three weeks in which it could have secured the position another way.
The guaranteed percentage is never one hundred, and the usual figure sits between eighty-five and ninety-five percent of the unpaid receivable. This is not drafting meanness: the retained share keeps the insured interested in selecting its customers and chasing its own debtors. An insurer covering everything would be insuring a portfolio nobody watches any more, and the losses it recorded would stop resembling the ones it priced. The percentage is therefore an alignment device before it is a sharing of cost.
The real danger of the line, though, is neither the limit nor the percentage, it is concentration. An insured whose turnover rests on a few large buyers can be carried off by the failure of one of them despite cover in perfect order: eighty-five percent of a receivable representing a third of the business does not fill the cash gap that receivable leaves. Insurance indemnifies a loss, it does not refinance a company, and the interval between loss and settlement is precisely when the insured must keep paying its own suppliers.
The practical rule is therefore a reversal. One believes one is buying a percentage; one is in fact buying a set of revisable limits, and the percentage applies only to what those limits let through. Reading your policy means reading the state of your limits, the date they were last revised, and the three clauses that organize their withdrawal. The headline rate is read afterward.
A components manufacturer insures its receivables. Its largest buyer carries an outstanding balance of 8 million euros. Three months before that buyer entered court protection, the insurer had cut the guaranteed limit from 8 to 5 million. The indemnity is computed on 5 million, at a rate of 85 percent, that is 4.25 million. The insured believes it lost 3.75 million through its insurer's fault. What did it actually lose, and where?
The indemnity is correct, and the loss sits somewhere other than where the insured is looking for it. It is not in the gap between 8 and 5 million, it is in the three months that followed the reduction. By cutting the limit, the insurer said something the insured could have acted on: it may not have given reasons, but it gave a date. Two questions therefore decide the file, and neither concerns the percentage. The first is when the reduction was notified and on what notice. The second is what was shipped after the effective date: receivables created above 5 million after that date are not badly indemnified, they are not covered at all, and that was the insured's decision rather than its insurer's. The final ratio says it without ambiguity: 4.25 million out of 8 is 53 percent of the exposure, where the policy advertised 85. The gap does not come from the rate, it comes from the limit, and an insured who read only the rate misread its own policy.
- 01What is bought is not a percentage, it is a set of revisable limits; the percentage applies only to what the limits let through.
- 02A limit withdrawal stops cover on what has not yet shipped, and arrives at the worst moment: order accepted, goods ready, relationship to protect.
- 03The insurer is not always free to give reasons for a withdrawal, because the reason often belongs to another of its insureds.
- 04The guaranteed percentage is never one hundred, and that is not meanness: the retained share is what keeps the insured watching its own customers.