IRDAI on Wednesday proposed a regulatory framework to facilitate general insurance companies to offer trade credit insurance covers to suppliers as well as licensed banks and other financial institutions to help businesses manage country risk. Trade credit insurance protects businesses against the risk of non-payment for goods and services by buyers. It usually covers a portfolio of buyers and indemnifies an agreed percentage of an invoice or invoices that remain unpaid as a result of protracted default, insolvency / bankruptcy.
Based on the recommendations of a working group on revisiting guidelines on trade credit insurance, the Insurance Regulatory and Development Authority of India (IRDAI) has now come up with draft guidelines on trade credit insurance.
IRDAI said the proposed guidelines set out the regulatory framework to promote sustainable and healthy development of trade credit insurance business.
The draft said it would also “facilitate general insurance companies to offer trade credit insurance covers to suppliers as well as licensed banks and other financial institutions to help businesses manage country risk, open up access to new markets and to manage non-payment risk associated with trade financing portfolio”.
The proposal is also aimed at enabling general insurance companies to offer trade credit insurance with customised covers to improve businesses for the SMEs and MSMEs, considering the evolving insurance risk needs of these sectors.
It further said the “scope of cover under trade credit insurance policy shall be the credit risk that has a direct link with an underlying trade transaction — the delivery of goods or services”.
If no such direct link exists, the outstanding amount is not insurable under a trade credit insurance policy, the draft said, and added the cover may include but not be limited to commercial risks and political risks.
Political risks cover would be available only in case of buyers outside India and in respect of those countries agreed upon at the proposal stage, said the draft on which IRDAI has invited comments from stakeholders till April 28.
The draft guidelines are for all insurers transacting general insurance business, registered under the Insurance Act, 1938. However, ECGC Ltd would be exempted.
Trade credit insurance contributes to the economic growth of a country by facilitating trade and helps in improving economic stability by addressing the trade losses due to payment risks.