Export credit insurance (ECI) plays a crucial role in safeguarding exporters by mitigating the risk of non-payment from foreign buyers. In essence, ECI provides exporters with a conditional guarantee of payment in case the buyer is unable to fulfill their payment obligations. This insurance enables exporters to minimize the risks associated with international trade and protect their foreign receivables from various factors that could lead to non-payment.
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Key Benefits of Export Credit Insurance
Offering Competitive Open Account Terms
ECI allows exporters to offer attractive open account terms to foreign buyers while reducing the risk of non-payment. Even buyers with a good track record can face unforeseen circumstances that may result in default. By minimizing the risk of default, exporters can boost their export sales, establish a stronger presence in emerging and developing markets, and compete more effectively in the global marketplace.
Enhanced Borrowing Capacity and Financing Terms
When foreign receivables are insured, lenders are more willing to increase the exporter’s borrowing capacity and offer more favorable financing terms. This means that exporters can access additional capital to fuel their business growth and expansion.
Coverage against Specific Risks
ECI covers both commercial and political risks that could lead to non-payment. Commercial risks include buyer insolvency, bankruptcy, and long defaults or slow payments. Political risks encompass war, terrorism, riots, revolutions, currency inconvertibility, expropriation, and changes in import or export regulations. It is worth noting that ECI does not cover physical loss or damage to goods or any other risks covered by marine, fire, accident, or other forms of insurance.
Characteristics of Export Credit Insurance
Export credit insurance has specific characteristics that exporters should consider:
ECI is recommended for use in conjunction with open account terms and pre-export working capital financing. It provides an additional layer of security for exporters engaging in international trade.
Risk and Claims
Exporters bear the risk of the uncovered portion of the loss, and their claims may be denied if they fail to comply with the policy’s requirements.
Pros and Cons
The advantages of ECI include reducing the risk of non-payment by foreign buyers and providing secure open account conditions in the global market. However, there are associated costs in obtaining and maintaining an insurance policy, and risk sharing in the form of a deductible is common (coverage is typically less than 100 percent).
Short-term ECI offers coverage of 90 to 95 percent against commercial and political risks resulting in buyer payment defaults. It covers consumable goods, materials, and services for up to 180 days, as well as small capital goods, consumer durables, and bulk commodities for up to 360 days. On the other hand, medium-term ECI covers large capital equipment for up to five years, providing coverage of 85 percent of the net contract value. Exporters are advised to purchase ECI proactively, ensuring coverage is in place before any customer becomes a problem.
Where to Obtain Export Credit Insurance
ECI policies are offered by private commercial risk insurance companies and the Export-Import Bank of the United States (EXIM), a government agency that supports US exports of goods and services to international markets. It is highly recommended for US exporters to consult specialized insurance brokers who can help find the most cost-effective solution for their specific needs. Reputable commercial ECI policy providers can be easily found online, and EXIM also offers direct purchase options. Additionally, EXIM provides a list of registered insurance brokers on their website or offers more information via their helpline.
Private Sector Export Credit Insurance
Premiums for private sector ECI are individually determined based on risk factors and may be reduced for established and experienced exporters. Multi-buyer policies generally cost less than 1 percent of insured sales, while prices for single-buyer policies vary depending on perceived risk. Unlike government-backed ECI, private sector insurers do not impose restrictions regarding foreign content or military sales, and they often offer flexible and discretionary credit limits.
EXIM Bank Export Credit Insurance
EXIM offers additional benefits through their export credit insurance:
- Clients obtaining an EXIM working capital guarantee can receive a 25 percent premium discount on multi-buyer insurance policies.
- Enhanced support is provided for environmentally friendly exports.
- Products must be shipped from the United States and have at least 50 percent US content.
- EXIM does not endorse military products or purchases made by foreign military entities.
- Export support may be limited or restricted in certain countries due to US government policies.
For more detailed information on credit insurance and to explore the offerings provided by EXIM, you can visit their official website.
This article is derived from the US Chapter 9 Government Trade Finance Guide and provides valuable insights into export credit insurance. Ensure you visit the EXIM website for comprehensive information on this crucial aspect of international trade.