Export trade credit insurance can be a company's smartest buy—a product that absorbs the cost of deadbeat debtors. The insurance covers credit risks caused by the default, bankruptcy or insolvency of a buyer's customers, up to a stated financial limit. All well and good, except when the insurer midway through the policy period cancels the limits of financial protection.

This was the unfortunate situation many policyholders fell into following the financial crisis that reared in 2008. Not that the insurers did anything wrong since the policy contract wording clearly stated that they could cancel the financial limits with a 24-hour notice. The reason for the cancellation is the insurer's sense that a customer's buyer is suddenly an excessively high credit exposure. The policyholder must now bear this risk on its own balance sheet.

No figures exist on how many policyholders received such luckless news, but it was likely more than a few, given the deep recession that ensued. The limit cancellations resulted in what Scott Ettien, senior vice president, trade credit and political risk, at insurance broker Willis calls a “black eye” for the insurers providing the cancelable limit coverage, despite the legality of their decisions. Combined with higher prices for the insurance, insurance premium volume fell precipitously.