Credit Insurance: Protect Your Business from Insolvency
In today’s dynamic business environment, companies face significant credit risks due to the complexity and diversity of markets. Understanding your customers is essential for making informed and secure financial decisions. Credit insurance serves as a strategic solution to mitigate these risks, protecting companies in their commercial transactions both domestically and internationally. This type of insurance not only covers the risk of customer non-payment but also provides additional benefits, such as continuous assessment of customer creditworthiness and proactive collection management.
» Companies face major credit risks due to market complexity and diversity. «
The Evolution of Credit Insurance in Peru
Credit insurance was introduced in Peru in 1972 as a promotional tool through Decree Law 19568, providing coverage for political and commercial risks faced by Peruvian exporters. In 1978, the Law for the Promotion of Non-Traditional Exports (Law 22342) further reinforced its role.
Initially, credit insurance was managed by the state-owned insurer, Popular y Porvenir Compañía de Seguros. By 1980, private insurance companies and commercial banks collaborated to establish Secrex Compañía de Seguros de Créditos y Garantías S.A., the first specialized credit insurance provider in Peru.
While export credit insurance was initially mandatory for non-traditional exports, today its coverage terms are not strictly regulated by Peruvian law. Instead, policy conditions are established contractually, with supplementary regulations from the Civil Code and the Code of Commerce.
Types of Credit Insurance
Credit insurance is classified into two main categories:
- Domestic Credit Insurance – Protects credit sales within the country.
- Export Credit Insurance – Covers international sales transactions.
Both types enable businesses to extend credit to customers without requiring additional guarantees, optimizing risk management and reducing potential financial losses.
Why Choose Credit Insurance?
By securing credit insurance, companies protect one of their most valuable assets—accounts receivable—while gaining a competitive edge by offering more flexible payment terms to clients. This fosters safer and more profitable business growth, both locally and globally.
How to Obtain Credit Insurance
Acquiring credit insurance involves a straightforward process:
- Policy Application – Submit completed forms and necessary documentation to the insurer, detailing your business and the clients you wish to insure.
- Insurance Offer – The insurer evaluates your application and proposes terms and conditions for the policy.
- Policy Issuance – Upon acceptance, the policy is issued and signed by both parties.
- Special Conditions – These define key policy details, including your tax ID, coverage period, and premium payment terms.
- Coverage Percentage – Determines the proportion of risk shared between the insured and the insurer.
- General Conditions – Outline the rights and obligations of both parties, specifying coverage scope, exclusions, and claims procedures.
Coverage Scope and Exclusions
Credit insurance safeguards businesses against commercial and political risks that could impact their operations:
Covered Commercial Risks
- Definitive Insolvency – When a buyer is unable to meet their payment obligations due to bankruptcy or liquidation.
- Payment Default – Failure to pay all or part of the credit within the agreed timeframe.
Covered Political Risks
- War, expropriation, nationalization, restrictions on foreign currency transfers, unilateral contract cancellations by the importer’s government, and other similar risks.
Exclusions
- Acts of terrorism, regulatory changes absolving the debtor, debts from subsidiaries or related parties, default interest, currency fluctuations, and credits not deemed fully certain and due.
What to Do in Case of a Claim
If a debtor defaults on payment, the insured company must immediately notify both the insurer and its insurance broker, providing relevant documentation such as orders, invoices, and any supporting records of the credit granted.
Upon notification, the insurer assesses the claim. If all conditions are met, the insurer compensates the insured for the outstanding amount. In many cases, the insured must transfer the rights to the unpaid debt to the insurer, allowing legal or negotiation actions for debt recovery.
Additionally, the insured is responsible for taking measures to minimize losses, such as offering extended payment terms. If recovered merchandise is involved, it is valued at market price, with proceeds applied first to cover indemnified amounts.
The Advantage of Risk Transfer
Transferring credit risk to an insurer offers multiple strategic benefits:
- Risk Prevention – Through in-depth credit investigations of key customers.
- Asset Protection – Loss indemnities secure business continuity.
- Financing Access – Enhances credibility with financial institutions.
- Debt Collection Assistance – The insurer manages collection efforts for unpaid invoices.
- Business Growth & Market Expansion – Facilitates secure trade across multiple countries.
Moreover, by improving financial ratings, ensuring stable cash flow, and enhancing risk management strategies, credit insurance contributes to sustainable business growth.
Conclusion
In an increasingly complex and unpredictable market, credit insurance is an essential tool for businesses seeking financial stability and protection against client insolvency. By covering both commercial and political risks, it safeguards accounts receivable, allows businesses to offer more competitive credit terms, and facilitates safer expansion into new markets.
At PRADO, we are dedicated to providing the best financial protection for your company. Don’t wait until a crisis hits—secure your business against unforeseen credit risks. Our customized solutions help enhance your profitability by
Safeguard your organization with the right insurance.
For details, contact a PRADO representative.
