Export Credit Ins

8/13/2019 Export Credit Ins

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Advantages &

Disadvantages ofExport CreditInsuranceBy Walter Johnson, eHow Contributor

Export credit insurance is a form of protection forexporting firms against nonpayment for or refusal ofshipments by customers abroad. Further, it can protectexporters from customers who become insolvent. Thereare both problems and benefits that come with this type

of insurance. As a matter of course, it seems advisablefor new businesses in the field, businesses that are justgetting started in the often troublesome export markets.For established firms with long-standing relationshipswith international clients, the problems with this type ofinsurance might outweigh the benefits.

1. Risko The primary benefit of this sort of insurance is that it

does protect against certain kinds of risk when doing business abroad. This is especially useful for firms thatare new to exporting. This permits firms to establishthemselves in the market by mitigating certain risks. In


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general, firms can now expand into the export marketthat would not be willing to take the risk otherwise.

Competitivenesso Buying a credit insurance policy for exports can also permit a new firm to offer more competitive credit termsfor potential buyers. This insurance can also be used ascollateral when approaching banks for credit. In general,export credit insurance is a good bet for new businessesin the field.

Disadvantageso Export insurance can limit one's freedom of action

abroad. Generally, only certain kinds of clients and acertain percentage of the loss will be covered. The firmoffering the policy will likely demand regular accountingof all export accounts from the firm. In addition, any

buyer can claim that the price is in "dispute," andinsurance will not cover such a disagreement. Firmsoverseas can claim a dispute in order to delay oreliminate legal action.More seriously, such insurance can lead to risky

behaviors for the firm in question. Firms with a goodinsurance policy can engage customers who areconsidered a risk, customers otherwise that would beignored. The possibility of default and bad faith thenincreases, leading insurance firms to become stricterabout what is covered.


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Export Credit Guarantee Corporationof India Insurance Plans for Banks

Export Credit Guarantee Corporation of India is a federal government ofIndia which provides export credit insurance facilities to exporters and banksin India. It functions under the administrative control of ministry of commerceand industry and is managed by a board of directors comprisingrepresentatives of the government, Reserve Bank of India, insurance andexporting community. Export Credit Guarantee Corporation of India isessentially an export promotion organization seeking to improve thecompetitive capacity of Indian exporters by giving them credit insurance. Itprovides wide range of insurance facilities to exporters, banks and financialinstitutions. Below are the insurance facilities provided to the banks:

1. Short Term pre-shipment insurance facilities to banks:

a) Individual Packing Credit Insurance Policy: This policy provides

protection to the banks against the losses that may be incurred in extendingpacking credit advances due to protracted default or insolvency of the exporterclient. A bank or a financial institution authorized to deal in foreign exchangecan obtain the individual packing credit cover for each of its individual clients.

b) Whole Turnover Packing Credit Insurance Policy: This policy providesprotection against the losses that may be incurred in extending packing creditadvances. A bank or a financial institution is eligible to obtain this whole

turnover cover for all its accounts.

c) Branch Wise Packing Credit Insurance Policy: A branch of a bank or afinancial institution authorized to deal in foreign exchange can obtain theBranch-wise Packing Credit Cover in respect of one or more of its exporterclients.

2. Short Term post-shipment insurance facilities for banks:
http://www.policybazaar.com/finance/general-insurance/export-credit-guarantee-corporation-of-india-ltd/export-credit-insurance-for-banks.htmlhttp://www.policybazaar.com/finance/general-insurance/export-credit-guarantee-corporation-of-india-ltd/export-credit-insurance-for-banks.htmlhttp://www.policybazaar.com/finance/general-insurance/export-credit-guarantee-corporation-of-india-ltd/export-credit-insurance-for-banks.htmlhttp://www.policybazaar.com/finance/general-insurance/export-credit-guarantee-corporation-of-india-ltd/export-credit-insurance-for-banks.html


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a) Individual export credit insurance for banks with exclusion: Any bank orfinancial institution who is an authorized dealer in foreign exchange can obtainthe Individual Post-shipment Export Credit Cover in respect of its exporter

client who is holding the appropriate Comprehensive Risks Policy of ECGCbut with specific exclusions. All post-shipment advances given throughpurchase, negotiation or discount of export bills or advances against bills senton collection are eligible under the policy.

b) Individual Export Credit Insurance for Banks without Exclusion: Anybank or financial institution who is an authorized dealer in foreign exchangecan obtain the Individual Post-shipment Export Credit Cover in respect of each

of its exporter-clients who is holding the Standard Policy of ECGC without anyexclusion.

c) Individual Post Shipment Insurance for Non-Policy Holders: Any bank orfinancial institution who is an authorized dealer in foreign exchange can obtainthe Individual Post-shipment Export Credit Cover in respect of each of itsexporter-clients who is not holding the Standard Policy of the company.

d) Individual Post Shipment Insurance For Shipments Excluding Cover ForShipments Made Against LC: Any bank or financial institution who is anauthorized dealer in foreign exchange can obtain the Individual Post-shipmentExport Credit Cover in respect of each of its exporter-clients who is holdingthe appropriate Comprehensive Risks Policy of ECGC excluding cover forshipments made against L/Cs.

e) Whole Turnover Insurance Policy: A bank or a financial institutiondealing with foreign exchange is eligible to obtain this Whole-turnover Coverfor all its accounts.

f) Export Finance Insurance Policy: Any bank authorized to deal in foreignexchange can obtain the Export Finance Cover in respect of its exporter-clientwho has been classified as a standard asset and whose Credit Rating isacceptable to export credit guarantee corporation.

3. Medium And Long Term Insurance Facility To Banks:


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a) Individual packing credit policy: Packing credit cover can be obtained bythe bank that provides advances/credit facilities to the exporters for thepurposes of manufacturing, processing, purchasing and/ or packing of goods

granted by banks to exporters who enter into contracts for export of servicesor undertaking construction works abroad. The cover provides protection tothe banks against losses suffered on account of nonpayment ofadvances/credit facilities due to insolvency and/ or default of the borrowerexporter.

b) Individual post-shipment credit insurance policy: Any bank or financialinstitution who is an authorized dealer in foreign exchange that provides post-

shipment finance to the exporter by way of purchase, negotiation or discountof export bills after the shipment has been affected pertaining to a particularproject.

c) Export performance credit insurance policy: The cover providesprotection to the banks against losses that it may suffer due to insolvency and/or protracted default of the borrower. Covers can be obtained for each BankGuarantees issued by the Bank at various stages of the contract.

d) Overseas lending credit insurance policy: If a bank financing anoverseas project provides a foreign currency loan to the contractor, it canprotect itself from the risk of non-payment by the contractor by obtainingExport Finance (Overseas Lending) Guarantee.

e) Cash flow deficit financing credit insurance policy: The banks or financialinstitutions lend money to the contractor to overcome cash flow deficits toensure smooth and timely execution of the project. This policy providesprotection to the banks against losses that bank may suffer due to insolvencyand default of the borrower.

One can study numerous insurance policies offered by Export GuaranteeCorporation of India to comprehend the various policies offered by thecompany. Further, one can make comparison between various policies inorder to select a policy covering every clause of their trade risk

Chapter 9: Export Credit Insurance


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This chapter is also available via download in PDF format .

Export credit insurance (ECI) protects an exporter of products andservices against the risk of non-payment by a foreign buyer. In

other words, ECI significantly reduces the payment risks associatedwith doing business internationally by giving the exporterconditional assurance that payment will be made if the foreignbuyer is unable to pay. Simply put, exporters can protect theirforeign receivables against a variety of risks that could result innon-payment by foreign buyers. ECI generally covers commercialrisks (such as insolvency of the buyer, bankruptcy, or protracteddefaults/slow payment), and certain political risks (such as war,terrorism, riots, and revolution) that could result in non-payment.ECI also covers currency inconvertibility, expropriation, and changesin import or export regulations. ECI is offered either on a single-buyer basis or on a portfolio multi-buyer basis for short-term (up toone year) and medium-term (one to five years) repayment periods.

Characteristics of Export Credit Insurance

Applicability Recommended for use in conjunction with openaccount terms and pre-export working capitalfinancing

Risk Exporters assume the risk of the uncoveredportion of the loss and their claims may bedenied in case of non-compliance withrequirements specified in the policy

Pros Reduces the risk of non-payment by

foreign buyer Offers open account terms safely in the

global market

Cons Cost of obtaining and maintaining aninsurance policy

Risk sharing in the form of a deductible(coverage is usually below 100 percent)
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broker who can help them select the most cost-effective solution fortheir needs. Reputable, well-established companies that sellcommercial ECI policies can be easily found on the Internet. Youmay also buy ECI policies directly from Ex-Im Bank. In addition, a

list of active insurance brokers registered with Ex-Im Bank isavailable at www.exim.gov or you can call 1-800-565-EXIM (3946)for more information.

Private-Sector Export Credit Insurance

Premiums are individually determined on the basis of riskfactors and may be reduced for established and experiencedexporters.

Most multi-buyer policies cost less than 1 percent of insuredsales, whereas the prices of single-buyer policies vary widelydue to presumed higher risk.

The cost in most cases is significantly less than the feescharged for letters of credit.

There are no restrictions regarding foreign content ormilitary sales.

Commercial insurance companies can usually offer flexibleand discretionary credit limits.

Ex- Im Banks Export Credit Insurance

Ex-Im Bank customers are advised to refer to the ExposureFee Information & Fee Calculators section (which are postedon the Banks Web site www.exim.gov under the Applysection) to determine exposure fees (premiums).

Coverage is available in riskier emerging foreign marketswhere private insurers may not operate.

Exporters electing an Ex-Im Bank working capital guaranteemay receive a 25 percent premium discount on multi-buyerinsurance policies.

Enhanced support is offered for environmentally beneficial

exports.


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The products must be shipped from the United States andhave at least 50 percent U.S. content.

Ex-Im Bank is unable to support military products or

purchases made by foreign military entities. Support for exports may be closed or restricted in certain

countries for U.S. government policy reasons (for moreinformation, see the Country Limitation Schedule posted onthe Banks Web site under the Apply section).

Export credit insurance Export risks

Risk Reasons

1. Paymentmethods biasedin favour of thebuyer

With the rise of global supplychains, buyers are in anadvantageous position. Big buyerssuch as retail chain stores inEurope and the US all requirepayment on credit basis.

2. Impact of non-paymentmagnified bynarrowing profitmargins

With narrowing profit margins, theloss incurred in any non-paymentfrom buyers can only be coveredby much larger orders. Forexample, to cover the loss of anorder worth $10,000, an exporterwill have to find a replacementorder of $100,000 if the profitmargin is 10%, and $200,000 ifthe profit margin is 5%.

3. Largeorganisationsnot necessarily

trustworthy

Even multinational corporationsmay have accounting scandals, asseen in the cases of Enron and

Worldcom. The uncertainty inevaluating intangible assets has


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led to volatility in credit ratings.Some countries in Europe and theAmericas give protection tobankrupt enterprises, leading torestrictions on debt collection bycreditors.

Balancing the risks: Transfer and manage ones risks by taking outexport credit insurance

Strengths of Hong Kong in export credit insuranceAbundant experience in foreign tradeInternational trade connectionsAdequate informationSound financial systemAccounting and legal systems compatible with international

standardsMature and efficient credit insurance market and mechanism

Export credit insurance services in Hong KongHong Kong Export Credit Insurance Corporation

Background: wholly-owned by Hong Kong Special AdministrativeRegion Government, established in 1966

Scope of services: provides the following services to companiesregistered in Hong Kong in extending credit to overseas buyers:

Scope ofservices

Main services

1. Export creditinsurance

A full range of insurance productsfor credit periods of up to 180 days

Export credit risks for capitalproductsInsurance policies tailor -made forthe clients needs

2. Creditmanagementservices

Regular monitoring of the paymentability of insured buyersAppraisal and adjustment of thecredit limit of buyers


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3. Dealing withpaymentdifficulties

Assistance to clients in recoveringoutstanding payments from buyers

4. Exportfinancing

Policies issued by the Hong KongExport Credit Insurance Corporationcan be used as collateral fordiscounting export bills by banks inHong Kong.Policy holders can assign ECICpolicies to banks by authorising thelatter as beneficiary of claims

Underwriting of risks: Where clients fail to collect payments forthe reasons set out below, the percentage of indemnity may be ashigh as 90% of the insured amount

Risk Principles of compensation

1. Buyer risk Buyer is unable to pay its debt orgoes bankrupt; buyer is unable tomake payment on time or breachescontract

2. Country risk Foreign exchange ban/hurdles,cancellation of import licence, importban on certain products, delay inrepayment of foreign debt, war,revolution, insurrection, and naturaldisaster

Setting of insurance premiums: Premiums are in direct proportionto risks. The following factors are considered in setting premiums: Quality of the buyer Distribution of risks Total value of the exported products Country/region of the buyer


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Length of credit period

Hong Kong Export Credit Insurance CorporationTel: (852) 2732 9988Website: http://www.hkecic.com

The worlds three biggest export credit ins urance organisations allhave offices in Hong Kong:-Euler-HermesTel: (852) 2867 0061Website: http://www.hk.eulerhermes.com

-AtradiusTel: (852) 3657 0700

Website: http://www.atradius.com.hk -CofaceTel: (852)2585 9188Website: http://www.coface.com.hk

Tips from HKTDC (on credit insurance) To prevent buyer credit problems, exporters should pay attention to the followingmatters:Monitor changes in the credit limit of the buyer granted by the credit insurance

organisationMake a forecast of whether the buyer will make payment in the coming six tonine months. The exporter can conduct an analysis on the basis of the buyersfinancial statistics, such as the companys performance records, profit/losssituation, payment records, etc.Pay attention to the financial information submitted by the buyer to theindustry/commerce registration authorities in its region, such as balance sheets,etc. Pay particular attention where the buyer is habitually late in submittingaudited financial reports.

Watch for any changes in the management and the financial partners of thebuyer. Frequent changes in the management of a company, its banks or itsauditors may indicate important changes in its internal operation.Monitor changes in the product and market. The buyers ability to pay will beaffected by the marketability of the product in the market.Keep in contact and share experience with people in the trade. Look out forchanges in the external economic factors as well as consumer sentiment in theimporting country.
http://www.hkecic.com/http://www.hkecic.com/http://www.hkecic.com/http://www.hk.eulerhermes.com/http://www.hk.eulerhermes.com/http://www.hk.eulerhermes.com/http://www.atradius.com.hk/http://www.atradius.com.hk/http://www.atradius.com.hk/http://www.coface.com.hk/http://www.coface.com.hk/http://www.coface.com.hk/http://www.atradius.com.hk/http://www.hk.eulerhermes.com/http://www.hkecic.com/

Documents

Export Credit Ins