5 types of export insurance
International business is a risk, which is why insurance cover is more important than ever for exporters. Here’s a guide to the five most popular export insurance products.
Murphy’s Law states: ‘Anything that can go wrong, will go wrong.’ While you may not be as pessimistic as Edward Murphy Jr, it doesn’t hurt to think about how you can mitigate all the negative possibilities to which exporting is exposed.
Fortunately, there are a number of ways you can invest in peace of mind. Export insurance, in its various guises, can not only make you more comfortable about doing business overseas, it allows you to focus on, and grow, your business internationally.
Credit insurance
Credit insurance, or trade credit insurance, is the most popular form of export insurance. Suitable for any business that extends credit to their overseas buyer, credit insurance covers the risk of your buyer becoming insolvent or unable to pay the money owed to you.
“Credit insurance will be able to offer 80-to-90 percent recovery to what was owed,” says Kirk Cheesman, managing director of NCI Brokers. “It also offers information and assistance with recovery, especially when businesses are marketing to potential new clients. Insurers will obtain credit reports, financial histories on the debtor, and look at if there’s any adverse information relating to directors and shareholders, and come back with a recommendation and endorsement.”
The premium on credit insurance is negotiated as a percentage against your expected turnover at the beginning of the year, Cheesman explains. If the actual turnover is under expectations, the insurer will charge a minimum base amount and a rate on the lower turnover. “Likewise, if they achieve more, there’ll be an adjustment for over and above,” he adds.
Four commercial insurers provide trade credit insurance — Atradius, Coface, Euler-Hermes and QBE — with government agency Export Finance and Insurance Corporation (EFIC) providing longer-term coverage, usually beyond two-year credit terms, where the commercial providers do not.
Credit insurance is harder to come by these days due to the uncertainty brought on by the global economic downturn, says Cheesman. “The insurers are more cautious given the current conditions, and there is more insolvency out there. You might also have risks in financial institutions. If people are selling on letters of credit, then normally the risk goes through the bank, but a lot of banks have fallen over in the last year so it’s not just the debtor, it’s the bank supporting the debtor.”
The benefits of credit insurance are that it provides the exporter with comfort in knowing that they’re not risking the business if something does happen to the buyer, as well as allowing them to extend credit to buyers unknown to the business, but considered a good prospect by the insurer. “It definitely protects the balance sheet and gives them more confidence to grow,” notes Cheesman.
Political risk insurance
Political risk insurance (PRI) is another type of coverage exporters need to consider, particularly in emerging countries. Political risk is defined as the risk of the overseas government intervening in your investments, which could be the goods you export, or any assets or business you have in the other country.
“Traditional PRI would cover a government confiscating or nationalising or expropriating your assets, or passing laws that block your ability to transfer money out of the country,” explains Chang Foo, head of Product Management and Risk Transfer at EFIC. He adds it also covers war risk and political violence, “like civil war or riots, insurrection, upheaval, coup d’etat: things that are beyond the control of the investor”.
Coverage has also widened to include other constrictions on an exporter’s ability to do business, says Foo, including import-export bans, such as the restriction of importing machinery to complete operations or a cancellation of your export licence; selective discrimination against foreign entities where the government changes the business environment by favouring local business; and business-to-government contracts where the government breaches its obligations, contravening international law.
More and more exporters are doing business with emerging economies, and many businesses aren’t aware of these risks, says Foo. “With emerging countries, you have weaker governments, weaker law, not as transparent judiciary systems as you expect in OECD [Organisation for Economic Cooperation and Development] countries. You could have an unstable regime in which governments come and go. This is where the PRI product comes into play.”
Both commercial and public agencies can provide political risk insurance, from the World Bank to regional and multinational commercial and government providers. “Normally it’s a given that if you buy an export policy you get political risk cover with it, especially non-acceptance,” says Cheesman.
However, a public agency can additionally leverage a government-to-government relationship in the event of a problem. “We can be more proactive and engage appropriate channels to make sure things don’t deteriorate. So we have the halo effect,” says Foo. “The World Bank has a larger halo effect, they have preferential creditor status.”
Got something to say? Join the export forum here at DynamicExport.com.au.
