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 international business 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 that could result in non-payment by the foreign buyers, such as insolvency of the buyer, bankruptcy, currency devaluation or protracted defaults (slow payment). ECI also covers certain political risks such as war, terrorism, riots, and revolution as well as currency inconvertibility, expropriation, and changes in import or export regulations.
ECI is generally 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. The cost of multi-buyer ECI is generally a fraction of one percent of the value of insured sales while the cost of single-buyer ECI varies widely due to more concentrated risk.
ECI premiums are based on individual risk factors such as the proposed payment terms, the foreign buyer’s creditworthiness, the countries involved in the transaction, the structure of the deductible and co-insurance, and the exporter’s previous international sales experience.
Overall, the cost of ECI is generally much less than the fees charged for letters of credit and can often pay for itself with the additional sales generated from offering competitive open account terms. In addition, the cost of ECI may be built into the sales price since most foreign buyers are willing to pay for a slightly higher price in exchange for open account with favorable extended credit terms.
Characteristics of Export Credit Insurance
Applicability: Recommended for use in conjunction with open account terms and pre-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: Reduces the risk of non-payment by foreign buyers. Offers open account terms safely in global markets.
Cons: Risk sharing in the form of a deductible and co-insurance (coverage is usually below 100 percent). Excludes physical loss or damage to the goods as well as foreign exchange loss.
Key Points
• ECI allows exporters to offer competitive open account terms to foreign buyers while minimizing the risk of non-payment.
• The cost of ECI, which is generally much less than the fees charged for letters of credit, is often built into the sales price to accommodate foreign buyers who wish to trade on open account terms.
• Even creditworthy buyers could default on payment due to circumstances beyond their control.
• ECI should be a proactive purchase, in that exporters should obtain coverage before a customer becomes a problem.
• With reduced non-payment risk, exporters can increase export sales, establish market share in emerging and developing countries, and compete more vigorously in the global market.
• When foreign accounts receivable are insured by ECI, lenders are more willing to increase the exporter’s borrowing capacity and offer attractive financing terms.
• ECI does not cover physical loss or damage to the goods shipped to the buyer, or any of the risks for which coverage is available through cargo, marine, fire, casualty, or other forms of insurance.
Short- and Medium-Term 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 100 percent coverage after a required minimum 15 percent down payment, usually covers large capital equipment up to five years.
Where Can I Get Export Credit Insurance?
ECI policies are offered by private-sector risk insurance carriers 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 and lenders are strongly encouraged to consider the use of a top tier specialized insurance broker to explore ECI options. Brokers provide a number of valuable services, typically at no charge to the policyholders, as they receive their compensation from commissions paid by a private insurance carrier or EXIM. Reputable, well-established specialized insurance brokers that sell ECI policies can be easily found on the Internet and the EXIM registered insurance broker locater on its website.
How Short-Term Single-Buyer ECI Works
The steps below provide a simplified example of how short-term single-buyer ECI works to help the exporter.
1. A new-to-export small U.S. company (exporter) discusses a potential sale with a first-time foreign buyer who wishes to trade on open account with 30-day payment terms.
2. With the foreign buyer approaching a European competitor who regularly sells on open account terms in global markets, the exporter contacts a specialized insurance broker or EXIM to discuss ECI options by presenting details of the proposed sale, such as the company’s previous exporting experience, the foreign buyer’s business information, the type of goods being sold, and the proposed payment terms
3. The exporter should explore ECI options before pricing negotiations with the foreign buyer in order to consider building the ECI cost into the sale price.
4. The insurance broker evaluates the transaction and associated risks to quote a premium for an ECI policy and discuss coverage terms.
5. Should the premium and coverage terms be acceptable, the exporter, in consultation with the insurance broker, develops and presents a transaction proposal for the foreign buyer, with, if appropriate, the ECI cost built into the sales price.
6. If the transaction proposal and terms are accepted by the foreign buyer, the exporter signs a sales contract.
7. The exporter pays a premium for the ECI policy after the sale occurs. Therefore, there is no risk to the exporter for applying for ECI coverage in the event the sale does not go forward.
8. The exporter then ships goods to the foreign buyer, if applicable, upon receipt of an agreed upon cash down payment.
9. If the foreign buyer defaults on payment terms, ECI pays the exporter by typically covering up to 90 to 95 percent of the contract value.
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