The issuance of export credit insurance and guarantees is an important spectrum of trade finance as it can reduce credit risks and allow exporters to offer open-account terms in competitive markets (Chauffour et al., 2010). From: The Evidence and Impact of Financial Globalization, 2013
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Export credit insurance (ECI) protects an exporter of products and services against the risk of non-payment by a foreign buyer. In other words, ECI significantly reduces the payment risks associated with doing business internationally by giving the exporter conditional assurance that payment will be made if the foreign buyer is unable to pay. Simply put, exporters can protect their foreign receivables against a variety of risks that could result in non-payment by foreign buyers. ECI generally covers commercial risks (such as insolvency of the buyer, bankruptcy, or protracted defaults/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 changes in import or export regulations. ECI is offered either on a single-buyer basis or on a portfolio multi-buyer basis for short-term (up to one year) and medium-term (one to five years) repayment periods.
Key Points
Characteristics of Export Credit InsuranceApplicability Recommended for use in conjunction with open account terms and pre-export working capital financing. Risk Exporters assume the risk of the uncovered portion of the loss and their claims may be denied in case of non-compliance with requirements specified in the policy. Pros Reduces the risk of non-payment by foreign buyers offers open account terms safely in the global market. Cons Cost of obtaining and maintaining an insurance policy. Risk sharing in the form of a deductible (coverage is usually below 100 percent). Coverage Short-term ECI, which provides 90 to 95 percent coverage against commercial and political risks that result in buyer payment defaults, typically covers (a) consumer goods, materials, and services up to 180 days, and (b) small capital goods, consumer durables, and bulk commodities up to 360 days. Medium-term ECI, which provides 85 percent coverage of the net contract value, usually covers large capital equipment up to five years. ECI, the cost of which is often incorporated into the selling price by exporters, should be a proactive purchase, in that exporters should obtain coverage before a customer becomes a problem. Where Can I Get Export Credit Insurance? ECI policies are offered by many private commercial risk insurance companies as well as the Export-Import Bank of the United States (EXIM), the government agency that assists in financing the export of U.S. goods and services to international markets. U.S. exporters are strongly encouraged to shop for a specialty insurance broker who can help them select the most cost-effective solution for their needs. Reputable, well-established companies that sell commercial ECI policies can be easily found on the Internet. You may also buy ECI policies directly from EXIM. In addition, a list of active insurance brokers registered with EXIM is available at www.exim.gov or you can call 1-800-565-EXIM (3946) for more information. Private-Sector Export Credit Insurance
EXIM Bank’s Export Credit Insurance
This article is from Chapter 9 of the U.S. government’s Trade Finance Guide. For more on credit insurance, visit the EXIM website. |