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Understanding the Importance of Export Credit Insurance

Export InsuranceIn addition to protecting yourself against loss due to protracted default or insolvency, cover is also provided against political risk. The credit intelligence that export credit insurers provide can be invaluable to any budding exporter.

For many years export insurance was led by the government’s Export Credit & Guarantee Department (ECGD). Since privatisation of their short-term insurance cover ECGD specialises in providing insurance and guarantees for larger sales of capital goods and projects. Contracts for smaller consignments of consumer goods and raw materials are now in the hands of the private sector.

Extended cover

There are no limiting restrictions in respect of cover — indemnity is provided up to 100 per cent of the debt. Depending on the insurer cover can include or be negotiated for the following eventualities:

•           loss of import or export licence
•           kidnap and/or ransom
•           non-delivery due to political interference

All policies issued nowadays are suitable collateral for bank advances. Combined policies to cover both domestic and export markets are also available.

Premiums

As previously mentioned there are no premium tariffs: premiums are based on the individual policy requirements. Annual premiums are normally quoted, but it is possible to pay either quarterly or monthly by direct debit.

Various services are offered by the insurers free of charge, some restricted by volume. These extras differ from company to company so it’s advisable to shop around to get the cover and service which is right for your business.

Other services

Additional services which are available to you can include cover in both developed and undeveloped countries, plus:

•           ongoing credit management
•           country risk advice
•           credit opinion service
•           provision of credit limits — this can be compulsory in some policies
•           currency risk appraisal
•           debt collection facilities

When considering using domestic and/or export credit insurance the cost must be weighed against the level of risk. As with all types of insurance higher risks mean dearer premiums; low premiums could signify negative risk, and you could be wasting your money. The decision to obtain cover, and the type of services needed, should be a joint management verdict between export sales and credit departments.

What ECGD Support Services Offer

To those of you who are involved with exporting capital goods, contractor’s plant or undertaking substantial overseas projects ECGD offers three main services. These will:

•           enable you to offer your customers finance packages where required
•           provide cover against non-payment
•           help you if things go wrong

Independently of the normal risks which were explained earlier, larger projects cover and finance may be required for periods from two to ten years. This is when ECGD can really be of assistance.

ECGD explained

Besides providing export insurance cover against insolvency, default, war or civil disturbance cover is also available in situations where countries run out of foreign exchange. This has happened in no fewer than 62 countries in the last 15 years.

ECGD can also protect your overseas investments and provide guarantees to UK banks supplying overseas finance packages to your clients. Credit opinions are also available to you: ECGD are able to use their vast banks of customer data, and if your customer is not known to them, ECGD will make enquiries through the normal channels, embassies and consulates.

Buyer credits

Much of the business done by ECGD involves buyer credits which are individually tailored to finance high valued capital goods and services overseas. Loans are made directly to your customers by a lending bank in this country. As soon as the contract and the loan are effective, you are paid as you fulfil the terms of the contract, as if it were a cash sale. Hundred per cent guarantees are provided to the bank by ECGD against an overseas borrower failing to pay.

Project finance

A limited recourse project financing package is available for major building projects where the lenders place primary reliance on the revenues from the project for repayment. There are many variants to this scheme, all of which are only suitable for contracts valued in excess of £20 million.

Bond risk cover

Under the terms of a bond insurance policy, bond risk cover can be advantageous to insure against a performance bond being called upon unfairly, or as a result of a contract being frustrated for political reasons.

Helping exporters

Many other services are offered by ECGD beyond the few highlighted above. Their services are designed basically for the larger exporter, and the other facilities on offer include:

•           claims and recoveries
•           lines of credit
•           tender to contract cover
•           forward exchange supplement
•           protection prior to finance being arranged

Details of their full range of facilities are available to all new or established exporters.