Excess Of Loss credit insurance cover has finally made its way to South Africa after being in development for the past 2 years. This is a real boost for local companies that credit insure their Business-to-Business debtors, which is a form of insurance that guarantees payment if any of their debtors fail to pay their account.
B2B credit transactions, otherwise known as Trade Credit or Commercial Credit, typically involve millions of Rands in transaction values and happens when a company grants their client a credit facility – usually for no longer than 30 to 60 days after the delivery of their goods or services. With high average account values, the loss of a payment from even one client can have a devastating effect on any business, which is why many businesses prefer to purchase credit insurance to help them manage the risk of non-payment.
One of the greatest frustrations however for companies whom credit insure their debtors is that they are granted insufficient credit cover by their primary insurer. Enter the Excess of Loss policy – known also by the acronym XOL.
XOL policies provide for an additional secured amount over and above the credit facility insured by the primary insurer. By way of example – a company needs to grant a R 10 million credit facility to satisfy the purchase requirements of their debtor. Their primary credit insurer can only agree to a R 6 million insured facility, meaning that they will only cover 60% of the “at risk” amount should the debtor fail to pay. In such an in instance the company will have to decide to either trade at their own risk or curb their debtor to only purchasing goods to the reduced value, which consequently has a negative effect on their turnover and their relationship with the debtor. By purchasing XOL cover over and above the amount approved by the primary insurer, the insured now has the option to purchase an additional required amount of cover (in this case the extra R 4 million) and thereby fully satisfying all their credit risk requirements to enable trade with their debtor at the full facility. In essence Excess Of Loss refers to the insured potion over and above the primary insured amount.
What makes the XOL product so unique is that this is the first time that a credit insurer brings a product to market that allows for an insured client to have cover on a particular debtor from more than one insurer. While this type of cover has been available in other developed markets for some time, it is a first for South Africa.
Pioneered by Hollard Trade Credit the product was brought to market in January 2021. This solution is extremely timeous for the SA market, as credit insurers have become more risk-averse owing to increased business failures from a weakened economy and the fallout from the Covid pandemic.
In a world where businesses must apply greater risk management; find better ways to protect their cashflow; and to trade safely, Hollard Trade Credit should be congratulated on this innovative solution.
The product is available via Debtsource as a specialist credit management company and specialist trade credit insurance brokerage.