Export
Credit Insurance
Export
credit insurance (ECI) protects an exporter of products and/or
services against the risk of nonpayment 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 in
the event that the foreign buyer is unable to pay.
Simply
put, with an ECI policy, exporters can protect their foreign
receivables against a variety of risks, which could result
in nonpayment by foreign buyers. The policy generally covers
commercial risks—insolvency of the buyer, bank¬ruptcy
or protracted defaults (slow payment), and certain political
risks—war, terrorism, riots, and revolution, as well
as currency inconvertibility, expropriation, and changes in
import or export regulations. The insurance is offered either
on a single-buyer or portfolio multi-buyer basis for short-term
(up to one year) and medium-term (one to five years) repayment
periods.
Key
Points
•
ECI allows you to offer competitive open account terms to
foreign buyers while minimizing the risk of nonpayment.
•
Creditworthy buyers could default on payment due to circumstances
beyond their control.
•
With reduced nonpayment risk, you can increase your export
sales, establish market share in emerg¬ing and developing
countries, and compete more vigorously in the global market.
•
With insured foreign account receivables, banks are more willing
to increase your borrowing capacity and offer attractive financing
terms.
Coverage
Short-term
ECI, which provides 90 to 95 percent coverage against buyer
payment defaults, typically covers (1) consumer goods, materials,
and services up to 180 days, and (2) 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.
How
Much Does It Cost?
Premiums
are individually determined on the basis of risk factors such
as country, buyer’s creditworthiness, sales volume,
seller’s previous export experience, etc. Most multi-buyer
policies cost less than 1 percent of insured sales while the
prices of single-buyer policies vary widely due to presumed
higher risk. However, the cost in most cases is significantly
less than the fees charged for letters of credit. ECI, which
is often incorporated into the
Characteristics
of Export Credit Insurance
Applicability
Recommended
for use in conjunction with open account terms and export
working capital financing.
Risk
Exporters
share 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
•
Reduce the risk of nonpayment by foreign buyers
•
Offer open account terms safely in the global market
Cons
•
Cost of obtaining and maintaining an
insurance policy
•
Deductible—coverage is usually below 100 percent.
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