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 insuranceproducts. 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, 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."
If you are a goods exporter, marine insurance is one of the most important types you should consider. "Financial protection of the shipment of products and goods is known as marine insurance, regardless of whether the mode of transport is over the sea, air, land or post," says Andrew Clarke, account executive with OAMPS Insurance Brokers. "There are numerous risks to consider when a business is involved in transporting goods, including damage to and loss of the goods." Because of the number of permutations a shipment of goods can undergo between seller to buyer-often from factories and storage facilities via airports, wharves, and other terminals-marine insurance is quite complex. As a general rule, however, exporters should aim for a policy that covers them from the time it leaves your premises until your customer has taken possession of it, advises Clarke. "Some business owners have fallen into the trap of not covering goods they are transporting and mistakenly believing their professional carrier’s insurance will cover the goods. Common carriers do not have specialist marine insurance, and the cover is usually limited." He adds that exporters also need to check that the insurer is capable of handling a claim globally, "otherwise having a claim paid could become an issue".
While there are a number of foreign exchange management strategies an exporter can use to mitigate losses through currency movements, some financial institutions and foreign exchange providers also offer currency insurance against conversion loss. This form of insurance is typical of long-range buying contracts where other strategies such as forward exchange contracts are unavailable.
Product liability insurance
An international product liability insurance product is similar to a domestic one and involves covering the risks arising from litigation or the cost of recall should the product you sell be proved faulty or fail to comply with appropriate regulations. Exporters need to ensure that they make every effort to comply with any laws associated with selling their product in the destination market, as insurance will not cover uninformed exporters. Compensation is therefore conditional on proving that the exporter unwittingly sold a product that was later deemed faulty or dangerous. Australian businesses have been increasingly growing trade with emerging economies, many of which represent great risks, but promise great returns. By considering and investing in these five types of insurance, exporters should become more comfortable with the risks of doing business globally, and be able to take advantage of growth opportunities around the world.