We recently debuted a “connected” accounts receivable insurance policy at the Global Insurtech Leaders’ Summit in New York. This fully digitized policy automatically pulls in data about customer defaults and delinquencies, performs required calculations and assessments per the terms of the policy, and pays out claims to the insured — all while keeping both parties’ internal accounting, claims, and other systems in sync.
The National Association of Insurance Commissioners, which is governed by U.S. insurance regulators, views the future of insurance as consisting of “reducing costs through enforcing a contract with a computer program instead of with personnel or third parties.”
As NAIC further elaborated:
Claims processing, amongst other processes, could be almost completely automated. For example, payouts to insured farmers might be triggered by a parametric smart contract when drought conditions are reported by verified climate/weather databases. [Technology] could be used to enforce contract specific rules and offer a reliable and transparent payout mechanism.
Using the Clause Platform, these types of automated insurance operations are now possible.
Background on Accounts Receivable Insurance
Accounts receivable insurance protects businesses against the fundamental risk of their customers not paying. A typical accounts receivable insurance policy describes which customers and receivables qualify for coverage, typically between 80 to 90 percent based on their perceived likelihood to pay, and standard insurance terms such as deductibles and exclusions. The terms of the policy also specify the types of events that trigger coverage, such as insolvency and default, provide loss avoidance and reporting requirements, and list fees for monitoring buyers.
In addition to reducing the risk of losses from nonpaying customers, accounts receivable insurance has several other benefits. These benefits include being able to allow customers more time to pay, expand into riskier markets or larger customers, and qualify for cheaper debt financing, including loans backed by the accounts receivables themselves. Accounts receivable insurance policy providers typically also assist with trade credit risk management.
Due to the benefits of accounts receivable insurance and increased digitization enabling it to be provided at lower cost, the number of firms offering the product has grown.
Despite the benefits of accounts receivable insurance, insurers and policyholders will not be able to capture its full benefits without properly integrating the underlying agreements into a digitization and automation framework.
Currently, digitization in insurance is limited and isolated. Global trade credit insurers, for example, often provide a digital customer portal for requesting changes to policies, managing and making claims, and viewing the risk profile of outstanding receivables. Other providers are beginning to digitize the payment aspect of insurance claims, enabling faster payouts to policyholders.
While extremely helpful to both policyholders and insurers, these solutions cannot provide end-to-end digitization and automation because they do not fully integrate the underlying policies and associated contractual obligations. Insurance is still an industry replete with manual processes and disconnected systems. As one industry researcher recently noted, “claims processing in the modern insurance space remains a manual, inefficient, error-prone operation.”
Digitization that is tied directly to the terms of an insurance policy make possible the complete, end-to-end automation of insurance. Contract-driven digitization for accounts receivable insurance would entail connecting receivables data from the insured’s accounting system to the terms of a policy. If the data about failures to pay indicate that a payout is required under the policy, a connected insurance policy will automatically generate a digital claims form. This form can be automatically sent to the insurer for claims processing, or be subject to approval before submitting the claim.
Once a digital claim is received, a contract-driven approach can enable the insurer to automatically process and, if required, pay the amount covered according to the terms of the policy. Digitized processes do not require end-to-end automation, however. Manual approvals and reviews may be built into the process as desired.
Importantly, for both the insured and the insurer, a truly digital and integrated insurance policy can automatically sync each parties’ internal accounting, claims management, and other systems to provide an accurate, real-time view of the related payment flows and cash balances.
Contract-driven digitization for accounts receivable insurance policy creates an inseparable link between the insured’s internal accounts receivable data, claims management process, and payouts that are validated by contractual obligations.
By creating a close link between business software and the legal terms, an insurance policy properly digitized can automate compliance with the underlying policy by assuring that the insured are accurately paid on time and that claims are correctly tied to insured losses and other requirements to which the parties are bound.
Connected Insurance Policies using Clause
The Clause platform for connected contracting, available as an application and through the Clause API, enables policyholders and insurers to create and benefit from contract-driven digitization and automation of accounts receivable insurance.
This Clause demo video shows a Seller purchasing insurance from Insurer to protect against the risk of Buyer not paying Seller for the goods it purchases on credit from Seller. Clause is able to connect the terms of the policy to underlying data about covered receivables so that a claim is automatically processed when — and only when — coverage is required. Clause replaces the payments, coverage amounts, and other operational clauses in the policy with Smart Clause® templates — legally binding contract clauses whose pricing and other objective terms are digitized and integrated with other systems.
The following is a sample Smart Clause for an insurance policy Schedule in an accounts receivable insurance policy:
This “smart” insurance Schedule is connected to data about the insured losses, captured in a system such as ERP software. The data about the insured losses automatically populates the claim form which, in turn, is sent for processing by the insurer. The payout is consistent with the terms of policy, which covers 90% of losses. This process is automated and captured by the insurer’s claims management system, reducing the possibility of errors.
Clause can connect insurance policies to business systems that are used by both the insured and insurers. It can also connect the policy to underlying data from sensors or IoT platforms to enable complete digitization in areas other than accounts receivable insurance, such as parametric coverage.
For more information about Clause connected contract products for insurance, contact firstname.lastname@example.org.