About Export Credit and Investment Insurance
The export credit insurance industry sits at the interface of global finance and trade. It provides a bridge between finance, trade and the real economy, acting as a catalyst for cross-border investment and economic growth.
- Export Credit Insurance protects exporting companies or their financiers against the risk of non-payment by a foreign buyer due to insolvency or protracted default
- investment insurance protects against losses to cross-border investments (equity, debt) as a consequence of political risks including: expropriation, political violence, currency inconvertability, embargo, forced abandonment or breach of contract
Most credit insurance policies provide comprehensive cover; protecting against non-payment due to both commercial and political risk.
Credit Insurance is commonly used for:
Compensation of loss, safeguarding continuity and enabling more open trade
Stabilising cashflow, credit monitoring, enabling new market entry
Either as collateral or direct cover to a lender, insurance can reduce the cost of finance
THE EXPORT CREDIT INSURANCE MARKET
Most industrialised countries, and many emerging economies, provide official support to cross-border trade and investment through export credit agencies (ECAs). There is also a large and well established private credit insurance market occupied by specialist credit and political risk insurance divisions of global insurance companies, and Lloyds Market Syndicates.
A number of multilateral agencies, including MIGA (part of the world bank), ICIEC (part of the Islamic Development Bank), ATI and Dhaman, provide credit and investment insurance products designed to stimulate trade and investment in specific geographic regions.
There is a unique and important synergy between the public and private sphere of the credit insurance market, and cooperation between the two brings additional capacity, diversification, and underwriting expertise to the market, both through re-insurance and co-insurance structures. Bringing together these different spheres of the industry in cooperative dialogue is one of the primary functions of the Berne Union.
EXPORT CREDIT PRODUCTS / BUSINESS LINES
Short Term Trade Credit
Short Term Trade Credit Insurance
- Focus: predominantly merchandise trade / commodities
- Tenor: <12 months in Berne Union data
- Cover: comprehensive cover against non-payment / buyer default
ABOUT ST INSURANCE
Short term credit insurance usually takes the form of supplier credit insurance directly between the exporter and the foreign buyer.
It provides cash flow relief when an exporter’s customers become insolvent or do not pay their bills due to commercial or political risks. Losses can then be indemnified, allowing the business to maintain its cash flow.
Insurance may cover the whole of the turnover (often with domestic sales included), key accounts only, or single risk transactions.
EXAMPLE TRANSACTION DIAGRAM:
Medium and Long Term Export Credit
Medium / Long-Term Credit Insurance
- Focus: capital goods exports
- Tenor: >12 months up to 20 years
- Cover: commercial and political risks
ABOUT MLT INSURANCE
Medium and long-term insurance provides protection against commercial and political risk when extending credit terms of 1-20 years or longer. With this security, exporters can increase their global competitiveness by offering buyers the financing needed to win international tenders. Such policies mainly take the form of buyer credit insurance – involving banks – to enable support for projects in power generation, large scale infrastructure, transportation and natural resources.
EXAMPLE TRANSACTION DIAGRAM:
Investment and Political Risk Insurance
Investment / Political Risk Insurance
- Focus: protecting equity and debt investments
- Tenor: up to 20 years
- Cover: cover against political and sovereign non-payment risks
ABOUT PRI / INVESTMENT INSURANCE
Political risk insurance protects against losses to cross-border investments such as equity and debt because of political events. These include expropriation, political violence, currency inconvertibility, embargo, forced abandonment or breach of contract.
Each year companies invest significantly in international markets, including developing, emerging and transition countries.
The reasons for foreign direct investment are diverse and include proximity to consumers, potential for additional sales, attractive local conditions, and direct access to natural resources.
However, the economic opportunities are often met by significant political risks in many regions across the world. With political risk insurance, a company can benefit through compensation of losses to investments (such as equity and debt) because of political events.
These include expropriation, political violence, currency inconvertibility, embargo, forced abandonment or breach of contract.
If the insurer is an ECA, political support can be provided by a national government in order to prevent further losses, help stabilise projects abroad and support companies to carry projects forward even under
Other Export Support Products
Other Export Support Products
Innovation and a changing financing landscape mean that Berne Union Members increasingly offer additional products, aimed at supporting exporters, including Cover for:
- Working Capital
- Bond Insurance for Exporters and Banks
- Sole Manufacturing Risk Cover
- Bond Issuance
- Cover for Pre-Paid Deliveries
Working capital support has become a standard instrument in the toolbox of most ECAs – mostly offered in the form of pure cover (i.e. insurance or guarantee of loans) but direct lending is also provided in some cases. In contrast to export credits, working capital loans are also provided by first-tier and second-tier domestic banks, hence ECAs are less dependent on having large international banks active in their home market which could be the reason why direct lending is less prevalent.
Working capital insurance protects the financial institution behind the working capital facility for the export transaction. It ensures the bank against the risk that the exporter will not pay amounts owed on the principal, interest and/or late payment interest. Cover is provided for the duration of the manufacturing or completion period. Upon delivery of goods or completion of work, the exporter receives payment through cash or refinancing from its client and then repays the working capital facility. If the exporter defaults on the working capital facility, the insurer will indemnify the bank after a short waiting period (usually three months).
Contract surety bonds are a widely used trade finance instrument whereby a bank guarantees on behalf of an exporter that in case of non-performance a defined sum will be payed to the importer on first demand. ECAs cover exporters for the risk of unfair calling of such bonds and also fair calling when political risks materialise. This protects the exporter against the risk of losing advance payments already received and used for production, but it doesn’t provide liquidity as such. However, ECAs also cover banks for the risk of exporters not being able to pay them for the called contract surety bonds. These counter-guarantees allow banks to increase or keep the guarantee limits for exporters without demanding cash-security in equal amounts – thereby freeing up liquidity for exporters.
A few ECAs also provide support for credits that are directly export related. Some are for exporters that invest in production capabilities at home others even for such investments abroad. Supporting export and internationalisation capabilities of companies by ECAs is not uncommon but still relatively rare.
Impact on Trade, finance and the real economy