Trade Credit Insurance: Operational Value and Contract Choice

Trade credit insurance (TCI) is a risk management tool commonly used by suppliers to guarantee against payment default buyers. TCI contracts can be either cancelable (the insurer has the discretion cancel this during insured period) or noncancelable terms cannot renegotiated within period). This paper identifies two roles of TCI: (cash flow) smoothing role (smoothing supplier’s cash flows) and monitoring (tracking buyer’s continued creditworthiness after contracting, which enables supplier make efficient operational decisions regarding whether ship goods buyer). We further explore better facilitate these modeling strategic interaction between supplier. Noncancelable rely on deductible implement both roles, may result in conflict: high inhibits role, whereas low weakens role. Under contracts, insurer’s cancelation action ensures that information acquired reflected shipping decision. Thus, adequate incentives perform its function without resorting deductible. Despite advantage, we find exercise option too aggressively; thereby restores preference for especially when outside unattractive cost low. are also relatively more attractive verifiable than it unverifiable. was accepted Vishal Gaur, operations management.