Export Credit Insurance

Export credit insurance is insurance that protects an exporter, or a bank that finances the exporter, against the risk that a foreign buyer does not pay for goods or services sold on credit. It covers commercial risks, such as the buyer's insolvency or long delay in paying, and political risks, such as a government blocking the conversion or transfer of currency, war or the cancellation of an import licence.

Export credit insurance is the cross-border branch of trade credit insurance. Short-term cover is sold mainly by private insurers, while long-term and high-risk cover often comes from a government-backed export credit agency (ECA). The insurance lets exporters offer credit terms instead of demanding cash in advance, and lets banks lend against foreign receivables they could not otherwise accept.

Selling abroad on credit is like lending your car to someone in another city: you trust the borrower, but you also worry about things neither of you controls, such as a road closure or a new law that stops the car crossing the border. Export credit insurance is a policy on that loan. If the buyer goes bust, or if the buyer's government will not let the money leave the country, the insurer pays most of what is owed.

Because the exporter keeps a small share of every loss, it still has a reason to choose buyers carefully. The policy also makes the exporter's unpaid invoices more attractive to its bank, much as an insured house is easier to borrow against than an uninsured one.

Policies usually list covered causes of loss in two groups:

• Commercial risks. The buyer's insolvency, a protracted default where the buyer simply does not pay within a set waiting period, and in some policies the buyer's refusal to accept goods that conform to the contract.
• Political risks. Transfer and convertibility restrictions such as exchange controls, war or civil unrest, expropriation, cancellation of export or import licences, and a public buyer's failure to pay.

Most policies exclude losses caused by the exporter's own breach of contract, disputes over quality until resolved, and exchange-rate losses, which are managed separately through hedging. Political cover is the feature that most clearly separates export credit insurance from domestic credit insurance.

The exporter applies for a policy and, for each buyer, a credit limit: the maximum amount the insurer will cover on that buyer at any time. The insured percentage is commonly well below 100%, so the exporter shares the loss. After a payment is missed, the exporter notifies the insurer, takes agreed steps to collect, and after a waiting period files a claim. The insurer then pays and gains subrogation rights to recover the debt from the buyer.

The basic claim payment is:

Here the eligible loss is the unpaid amount that falls within the credit limit and the policy's terms. For example, if an exporter ships goods worth $400,000 to a buyer with an approved limit of $300,000 and an insured percentage of 90%, and the buyer becomes insolvent, the eligible loss is capped at $300,000. The claim paid is 0.90 × $300,000 = $270,000; the exporter bears the remaining $130,000.

Short-term policies cover sales on credit terms of up to about a year, typically consumer goods, raw materials and parts, and are often written on a whole-turnover basis covering all of an exporter's foreign buyers. In the European Union, short-term risks on buyers in EU and core OECD countries are treated as "marketable", so state-backed insurers are generally kept out of that segment and private insurers supply it.

Medium- and long-term cover supports sales of capital goods and projects repaid over several years. It is usually written per contract by an ECA, priced under the OECD Arrangement, and often backs supplier credit or bank buyer credit. These policies can run for ten years or longer, a period no private insurer would normally accept for country risk in many markets.

An exporter can assign the benefit of its policy to its bank. The bank then lends against the insured receivables, a form of post-shipment finance, or buys them through factoring without recourse or forfaiting. Lenders value the cover because it reduces the credit risk on accounts receivable owed by distant buyers, though they check carefully that the exporter complies with policy conditions, since a breach can void a claim. Premiums depend on the buyer's quality, the country, the credit period and the exporter's own loss history, and the insurer may cut or cancel limits on short notice when a buyer or sovereign risk worsens.

• Berne Union
• OECD: Export credits