Trade credit insurance glossary: 10 key terms explained

Credit risk is the likelihood that a customer won’t pay the money owed when payment is due. For businesses that sell goods or services on credit (a common practice in B2B trade), managing this risk is an important part of protecting cash flow.

In TCI, the buyer is the business that purchases goods or services from the insured company. Put simply, it’s our customer’s customer – the company responsible for paying the invoice.

Refers to the money owed to a business by customers for the goods or services supplied on credit. These receivables are what TCI is designed to protect.

A buyer assessment, or risk grading, is the process of evaluating the financial health and creditworthiness of a buyer based on publicly declared and privately shared financial data, corporate strategy, investments, debt and other factors. The grade summarizes the risk of insolvency within the next 12 months.

At Allianz Trade, we use information such as financial performance, payment history and wider economic or sector conditions to evaluate the likelihood that a buyer will meet its payment obligations. This informs our decision about the level of cover we can provide. 

The insurer’s decision, for each credit limit request put in by a customer, about whether and to what extent to insure a transaction between the customer and a given buyer. Our underwriters take into account factors such as the risk grade when making this decision.

In trade credit insurance, the credit limit is the maximum amount of money the insurer agrees to cover for a particular buyer. It determines how much of the policyholder’s exposure to that buyer can be covered. In the event of a claim, the amount paid will also depend on the policy’s terms and conditions. 

A discretionary credit limit, meanwhile, is the maximum amount up to which a policyholder can obtain cover for a buyer without requesting specific approval from the insurer, provided the conditions set out in the policy are met. 

Excess of Loss is a type of trade credit insurance designed to protect businesses against significant losses above a predefined amount. This serves as an additional layer of protection on top of a TCI policy. Allianz Trade’s XoL solutions are customized to meet individual needs and are best suited to companies with established internal credit management processes that can sustain normal or expected losses but need protection against larger, unexpected losses.

Know your Customer refers to processes used by financial services companies to verify the identity of customers. These checks support regulatory compliance and are an important step in preventing fraud and managing risks related to financial crime, customer solvability and reputation.

Insolvency occurs when a company is unable to pay its debts when they are due. If a buyer becomes insolvent before paying an invoice, the seller may face a financial loss. Protecting businesses from this type of non-payment is one of the core functions of TCI, as insolvency can precede bankruptcy.

Indemnification is the compensation the insurer pays its policyholder for a covered loss. If an insured buyer fails to pay and the policy conditions are met, the insurer compensates the policyholder for the insured portion of the loss. At Allianz Trade, we offer amicable and judicial collection services to accompany indemnification.