What is underwriting in credit insurance?

In today’s often volatile business environment, extending trade credit to customers is both a necessity and a risk. For companies that sell goods or services on credit, the risk of customer default can have serious financial consequences. Credit insurance offers a robust safeguard against non-payment, supported by an advanced underwriting process that combines data, expertise, and market insight. Credit limit decisions reflect a level of analysis that few organisations can replicate internally. This article explores how credit insurers evaluate risk and determine appropriate credit limits, providing clarity for companies considering this form of protection.

Understanding credit insurance

Credit insurance protects businesses against the risk of non-payment by their buyers. If a customer fails to pay due to insolvency, protracted default, or political risk (in the case of export transactions), the insurer compensates the policyholder for the insured amount. This coverage can stabilise cash flow, support growth, and improve access to financing.

Before coverage is granted, insurers must assess the risk associated with each buyer. This is where underwriting comes into play to support sustainable growth in commercial activity.

The role of underwriters

Underwriters are the backbone of the credit insurance process. Their primary role is to evaluate the creditworthiness of a business’s customers and determine the level of risk associated with insuring those receivables. This evaluation informs the insurer’s decision to approve, modify, or decline coverage.

Underwriting in credit insurance combines quantitative analysis with qualitative judgement, drawing on financial data, market intelligence, and business behavioural insights.

The sources underwriters use

Underwriters rely on a wide range of data sources to build a comprehensive picture of a buyer’s financial stability. These include:

Modern underwriting relies on a combination of external sources and sophisticated proprietary tools. Databases offer insights into buyer behaviour across suppliers. Financial modelling software supports scenario analysis and stress testing. Internal claims data helps identify patterns and emerging risks. Credit insurers also use artificial intelligence and machine learning to enhance predictive accuracy, especially for large portfolios with thousands of buyers.

The decision-making

Based on those sources, credit insurance underwriters typically analyse risk across several dimensions:

1. Financial health of the buyer

The starting point is a thorough review of the buyer’s financial statements. Underwriters examine:

• Balance sheet strength: Liquidity ratios, debt levels, and working capital
• Profitability: Trends in margins, net income, and return on equity
• Cash flow: Ability to generate cash from operations
• Payment history: Past behaviour in settling invoices, including any defaults or delays

2. Industry and market Conditions

The buyer’s industry plays a significant role in risk assessment. Underwriters consider:

• Sector volatility: Cyclical industries (e.g., construction, automotive) may carry higher risk
• Competitive landscape: Market share, pricing pressures, and barriers to entry
• Macroeconomic factors: Interest rates, inflation, and geopolitical risks affecting the sector, supply chain dependencies
• Country risk and political risk – in case of export transactions

3.  Buyer behavior and relationship history

Underwriters also consider qualitative factors: This helps to detect early warning signs that may not be evident in financial data.

• Length of relationship: Long-standing customers with consistent payment behaviour are viewed more favourably
• Order patterns: Sudden increases in order volume may signal distress or opportunistic behaviour
• Payment experience: With a large number of suppliers who have a limit on one customer with the insurer, the insurer can draw on a larger amount of payment experience. Significant suppliers generally pay on time longer than insignificant ones, which means that a liquidity bottleneck can be identified earlier
• Communication: Responsiveness and transparency in financial disclosures 

Credit limit decisions made

Based on the risk assessment, the underwriter recommends a credit limit — the level of coverage designed to enable the policyholder’s commercial ambitions while maintaining financial resilience. The decision reflects a careful balance: empowering business growth and trade opportunities while ensuring prudent risk management that protects both the client and the insurer.

The main priority is to protect customers from potential bad debt losses. When a customer receives a restrictive or negative credit decision, credit insurers signal a potential bad debt loss for them. In many cases, underwriters provide ongoing monitoring and alerts, helping businesses stay ahead of potential defaults.

Credit limits are not static. They are reviewed regularly and can be adjusted based on new information, such as updated financials or changes in payment behaviour.

Transparency and communication are key

Credit insurers make credit limit decisions through a structured and transparent process designed to give businesses confidence and clarity:

• Online platforms: Where policyholders can request limits, view decisions, and track changes
• Buyer monitoring: Alerts on changes in buyer risk profiles
• Dialogue with underwriters: In complex cases, insurers may engage directly with policyholders to explain decisions or explore alternatives

Underwriters work closely with policyholders to ensure accurate and timely risk assessment. Customers play a critical role in this collaboration by:

• Providing buyer information: Including financials, payment terms, and transaction history
• Monitoring exposures: Ensuring that credit limits align with actual receivables
• Reporting overdue accounts: Prompt notification of late payments is essential for claims eligibility

Regular communication between the customer and the insurer can also unlock additional coverage. If a buyer improves their financial position or resolves past issues, the underwriter may be willing to increase the credit limit. This flexibility supports business growth while maintaining risk discipline.

Tangible benefits for insured businesses

Credit insurance is a powerful tool for managing trade credit risk. Its effectiveness depends on the quality of underwriting and the appropriateness of credit limit decisions. By understanding how underwriters assess risk – through financial analysis, industry insight, and buyer behaviour – businesses can better navigate the process and make strategic use of credit insurance.

Moreover, the underwriting process itself provides several tangible benefits to insured businesses:

Ultimately, the structured and data-driven approach of underwriters not only protects businesses from financial loss but also strengthens their overall credit management framework.

To explore how to strengthen your own credit risk strategy, get in touch with us and see how we can help you stay ahead.