There are two trends we should look at before examining the essentials of credit insurance and how to purchase it. They are:

1. Greater availability. "For a time, there were only two companies offering credit insurance in the U.S.," explains Jim Hawkins, general agent with Jim Hawkins Agency Corp. (Medina, Ohio), and a 46-year veteran of the credit insurance profession. "Since so many policyholders were wanting to insure the same accounts, these insurance companies had to cut off coverage so as not to exceed their capacities." Now, there are at least six major players in the U.S. credit insurance market, and coverages are much more easily available.

   Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

2. The booming economy. In addition, and this seems contra intuitive on the surface, the booming economy has helped fuel the popularity of the product. "You would think that most credit insurance would be sold during periods of depression and recession, but it's actually the opposite," explains Hawkins. During recessions, sales are down, and accounts receivable portfolios are thus also down. "In boom times, accounts receivable skyrocket, and this is when companies tend to want coverage," he continues. The last two years, in fact, have been the very best in the history of credit insurance in the United States, according to Hawkins. "It's no coincidence that accounts receivable have been higher than ever before during these last two years."

1. Don't purchase credit insurance as a way to try to make money. "It is most cost-effective when it's used for catastrophic coverage, just as any other kind of business insurance," he emphasizes.
   Suppose that, historically, as a small company, you have averaged $10,000 a year in accounts receivable losses (bankruptcies and other bad debt). One year might be $8,000, another year $14,000, another year $6,000. The average, however, is $10,000, and this average annual loss is considered a "cost of doing business."

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   Obviously, no insurance company is going to want to sell you credit insurance with no deductible in this scenario. If they did, they would have to automatically pay out thousands of dollars each year to you.
   "The idea is to cover catastrophic losses, not to protect yourself from the $10,000 cost of doing business each year," emphasizes Hawkins.
   For this reason, you can expect that the insurance company will seek to write a policy with at least a $10,000 deductible. To be able to purchase catastrophic coverage even more cost effectively, though, Hawkins recommends offering an additional "buffer" to the insurance company--being willing to sustain, for example, a $12,000 deductible.
   "Going that little extra bit can generate a real break on your coverage cost," he says. The reason is that it saves the insurance company from the challenges and hassles of having to deal with collection efforts, pay outs, and so forth on every little extra bit of losses between $10,000 and $12,000. (Many large corporations, for example, according to Hawkins, have $25 to $50 million policies with $1 million, $5 million and even $10 million deductibles--amounts that they can self insure without changing the need for this insurance.)

2. Don't purchase credit insurance as a way to increase sales. "A lot of companies think that, if they get coverage for their insurable accounts, they can turn around and start selling to higher risk accounts," notes Hawkins. "What this says is that you're willing to take a risk that you otherwise wouldn't take, and this can lead to trouble. You should purchase credit insurance because accounts receivable are your first or second largest asset, not because you want to expand sales."

3. Shop around with different carriers. Each carrier offers a different package. Some, for example, recommend higher deductibles while others recommend lower deductibles. Some have greater expectations in terms of how much effort you must expend in trying to collect accounts before submitting them. Some have different co-insurance amounts (e.g., the percentage of a claim over the deductible that they pay compared with the percentage of the loss that you must cover yourself).

4. Read the policy closely. This is one of the very most important steps. "The statement too often heard from insurance agents is, 'Don't worry; you're covered,"' points out Hawkins with a laugh. "Then, after a loss, he'll say, 'I didn't say that. I said you were covered if you did everything I thought you were going to do."

• "Give me the layout of a loss. What will happen in detail?"

• "Here is my biggest account. Give me the details of the scenario if I take a loss with this account. What will I get?"

• "Tell me what I'm not going to get. What can you do to me in the way of saying at some point in the future, 'You're not covered for this'?"