1. Credit Risk (신용위험)
Refers to the possibility that a counterparty (debtor) may fail to meet its obligations due to factors like deteriorating financial health,

bankruptcy, or insolvency. Credit insurance helps companies mitigate potential losses arising from these credit risks.

2. Policyholder (보험 계약자)
The business or individual who enters into a credit insurance contract and pays the premium.

Policyholders reduce their potential losses according to the coverage provided by the insurer.

3. Insured (피보험자)
The party that receives coverage under the policy. In credit insurance, this is typically the company extending trade credit (i.e., selling goods or services on account).

4. Insurance Proceeds (보험금)
The amount paid by the insurance company when a covered credit risk event occurs and is recognized as an insured loss.

These proceeds compensate for some or all of the unpaid receivables to mitigate the insured’s financial loss.

5. Deductible (면책금액)
The amount the insured must bear before insurance proceeds are paid out.

Often set as a certain percentage, it represents risk-sharing between the insurer and the insured.

6. Policy Limit (보험한도)
The maximum amount the insurer will pay under a credit insurance policy.

It can be set per transaction, per debtor, or for the policy as a whole.

7. Coverage Scope (보장범위)
The range of credit risks covered by a credit insurance policy.

Most credit insurance covers defaults, bankruptcies, and delayed payments by specific counterparties;

it may also protect against losses arising from political or country-specific risks.

8. Credit Assessment (신용 평가)
The process by which an insurance company evaluates the likelihood of default by the policyholder’s counterparties.

This assessment influences the scope of coverage and the premium charged.

9. Premium (보험료)
The amount the policyholder pays to maintain the credit insurance policy.

Premium rates vary depending on coverage limits,

counterparties’ credit ratings, policy duration, and other factors.

10. Policy Term (보험기간)
The period during which the insurance policy is valid. Credit insurance policies often run on a yearly basis, with the option to renew.

11. Notification of Claim (사고 발생 통지)
The process of informing the insurer when a credit risk materializes, prompting a possible compensation claim.

This notice must typically be given within a specified timeframe; failure to do so may limit or void coverage.

12. Claim for Compensation (보상금 지급 청구)
The procedure the insured follows to request payment from the insurer after a covered loss occurs.

Following proper notification and submission of required documents, the insurer processes and pays the claim.

A company’s credit risk refers to the possibility that it will be unable to meet its debt obligations.

This risk includes failing to pay back borrowed funds or interest on time, as well as any situation

where the company does not fulfill its payment commitments.

Credit risk is considered a critical issue for financial institutions, investors, and creditors alike.

Financial Health

A company with a weakening financial position may struggle to repay debts. As its fiscal stability declines, credit risk increases.

Profitability 

Reduced operating or net income can lead to insufficient cash flow to cover debt obligations, negatively impacting the company’s credit rating.

Management Capability

Poor managerial decisions or failed investments can heighten the likelihood of default.

External Environment

Factors such as economic recessions, rising interest rates, or increases in raw material costs can erode profitability and elevate credit risk.

Industry Risks

Certain industries are more prone to cyclical economic fluctuations, making companies in those sectors inherently more vulnerable to credit risk.
 

1. Avoidance
A strategy aimed at eliminating the risk altogether.

For instance, a company might decide not to offer any credit sales, thereby completely avoiding the risk of non-payment.

By imposing strict transaction conditions, the company blocks potential losses at the source.

2. Retention
A strategy where the company acknowledges and accepts the risk.

For example, a business might proceed with credit sales without any protective measures, essentially leaving outcomes to chance.

While they are aware of the risk, they choose to bear any resulting consequences.

3. Reduction
A strategy designed to lessen risk through various safeguards.

Examples include requiring collateral or obtaining guarantees, thus reducing the potential losses from credit sales.

4. Transfer
A strategy of shifting risk to a third party.

Credit insurance or surety insurance are prime examples: companies transfer the potential losses from credit transactions to the insurer.

This is a widely adopted approach that businesses use to manage and reduce credit risk.

Effective credit management not only reduces the risk of uncollected receivables

but also plays a vital role in maintaining a healthy cash flow, preserving financial stability,

and expanding growth opportunities. Through systematic credit management,

a company can bolster its preparedness for unexpected risks, sustain a stable operating

environment, and build long-term competitiveness.

Key reasons credit management is essential for businesses include:

•    Ensuring stability of cash flow
•    Reducing the risk of debtor default
•    Managing funds efficiently and lowering capital costs
•    Preserving financial health and credit ratings
•    Enabling business growth and new deal opportunities
•    Identifying and responding to financial risks in a timely manner

Over the years, clients have shared the following common needs regarding credit insurance:

•    Proactive strategies to handle the risk of default among credit customers
•    Greater sales opportunities once adequate safety measures are in place for existing customers
•    Ability to secure reputable clients without requiring collateral
•    Cost reduction and revenue growth at the same time
•    Significant increase in exports without incurring excessive risk
•    Expansion of sales through overseas subsidiaries to meet urgent needs, yet concerns about risk remain
•    Instant assessment of business partners’ credit status and credit limits
•    Protection and improvement of financial statements via accounts receivable credit insurance
•    Reduced funding costs and interest rates
•    Efficient staff management to cut personnel costs
•    Availability of a specialized risk management team without forming an in-house unit
•    Factoring services for exports
•    Additional financing options beyond the Korea Trade Insurance Corporation for export transactions

Credit insurance is an insurance product designed to protect sellers against losses that may occur

when their buyers (debtors) default on payments for goods or services sold on credit.

It is typically used to mitigate the risk of non-payment when a company sells goods or services on account.

By doing so, businesses can reduce the credit risk associated with their receivables.

Credit insurance first emerged in Europe in the late 19th century as a means to reduce the risk

of payment defaults in business transactions. As export activities gained momentum in countries

such as Germany, France, and the UK, credit risk became a pressing concern.

Credit insurance evolved in response to these risks, and with increasing globalization and

expanded trade, it has taken on an increasingly significant role in global finance.
 

In Korea, the introduction of credit insurance was motivated by the need to support economic growth

and the expansion of international trade. Throughout the 1970s and 1980s, as Korea’s

economy grew rapidly and shifted toward export-led industries, overseas receivables risk began to rise.
 

1992: Establishment of the Korea Trade Insurance Corporation
The government founded the Korea Trade Insurance Corporation (K-SURE) in 1992, providing export

companies with protection from the credit risks of international buyers.
 

Introduction of Accounts Receivable Insurance by KODIT and SGI
Subsequently, to protect small and medium-sized enterprises (SMEs) in the domestic market,

the Korea Credit Guarantee Fund (KODIT) introduced an accounts receivable insurance

program to help SMEs mitigate domestic receivables risk.

SGI Seoul Guarantee now also provides credit insurance solutions to businesses looking

to hedge credit risks associated with their receivables.

Traditional Collateral Approach
A lender offering a loan typically requires the borrower to provide assets as collateral.

Should the borrower fail to meet their debt obligations, the lender can sell the collateral to recover losses.

While this reduces risk for the lender, it poses challenges for SMEs or startups that lack sufficient collateral.

Additionally, disposing of collateral can be time-consuming and costly.

Credit Insurance Approach
Credit insurance protects the receivables that arise from specific transactions, without requiring collateral.

If a buyer does not pay, the insurance company will compensate the insured business

(according to the policy terms), covering part or all of the unpaid receivables.

As this insurance focuses on the creditworthiness of the buyer, companies can confidently grow

their customer base—especially if their customers have good credit ratings—even if the company

itself has limited collateral.
 

Operating Entity
•    KODIT’s Accounts Receivable Insurance: Operated by a public institution (Korea Credit Guarantee Fund).
•    SGI’s Accounts Receivable Credit Insurance: Operated by a private surety/insurance firm (SGI Seoul Guarantee).

 Eligible Companies
•    KODIT: Primarily SMEs.
•    SGI: SMEs as well as mid-sized and large companies.

 Scope of Coverage
•    KODIT: Mainly domestic receivables.
•    SGI: Can cover both domestic and international receivables.

Cost & Flexibility
•    SGI: Premiums can be higher but the policies tend to offer greater flexibility.
•    KODIT: Often lower premiums due to policy-driven support. 

•    Risk Diversification: Unpredictable losses are transferred to another entity, bolstering a company’s financial stability.

•    Operational Efficiency: Reduces the burden of risk management, allowing businesses to focus on core operations.

•    Sales Growth Opportunities: With reduced concern over non-payment, companies can pursue more aggressive business strategies.

•    Sustainable Growth: Protects a firm against unforeseeable default risks, establishing a solid foundation for long-term development.