What Is Export Credit Insurance & How Does It Work?

Understanding Export Risks

Exporters face unique financial risks when selling goods and services internationally. These challenges necessitate specialized financial tools to protect against potential losses. One significant concern is the risk of a buyer becoming insolvent, meaning they are unable to pay their debts. This can result from various financial difficulties or bankruptcy, leaving the exporter with unpaid invoices for goods already shipped.

Another substantial risk is protracted default, where a buyer fails to pay within the agreed-upon terms, even if not formally insolvent. This can tie up an exporter’s capital and disrupt cash flow for extended periods. Currency fluctuations can also impact the value of payments received, especially if contracts are denominated in a foreign currency that depreciates against the exporter’s domestic currency before payment is made.

Political instability in the buyer’s country presents considerable risk. Events such as war, civil unrest, or government actions like expropriation of assets can prevent a buyer from fulfilling their payment obligations.

Core Coverage of Export Credit Insurance

Export credit insurance provides coverage against two primary categories of risks: commercial and political. Commercial risks involve the financial inability or unwillingness of a foreign buyer to pay for goods or services. This includes buyer bankruptcy or formal insolvency, where the buyer is legally declared unable to meet their financial obligations.

Coverage also extends to protracted default, which occurs when a foreign buyer fails to pay within a specified period after the due date, often 90 to 180 days, without a formal declaration of insolvency.

Political risks encompass actions by foreign governments or events beyond the control of the buyer that prevent payment. Examples include war, revolution, or civil strife in the buyer’s country, which can disrupt trade and payment channels. Coverage also extends to acts of expropriation, where a foreign government seizes the buyer’s assets, or currency inconvertibility, making it impossible to convert local currency payments into the exporter’s currency. The revocation of import licenses or the imposition of new import restrictions by a foreign government can also trigger political risk coverage.

How Export Credit Insurance Operates

The process of obtaining export credit insurance begins with an application from the exporter. This application involves an assessment of the exporter’s business operations, their financial health, and the creditworthiness of their foreign buyers. Insurers evaluate factors such as the buyer’s payment history, financial statements, and the economic conditions in their country to determine eligibility and policy terms.

Once a policy is in place, exporters manage it through ongoing reporting and adherence to specific terms. This includes reporting shipments as they occur and paying premiums based on the value of those shipments. Monitoring approved buyer credit limits is a continuous process, ensuring that the total exposure to any single buyer remains within the insured thresholds.

If a covered risk occurs, such as a buyer’s protracted default or insolvency, the exporter initiates a claims process. This involves reporting the default to the insurer within a specified timeframe, often within 30 to 60 days of the payment due date. The exporter must provide documentation proving the debt and the occurrence of the insured event, such as invoices and shipping documents. Following a waiting period, which can range from 90 to 180 days after the default, the insurer processes the claim and reimburses the exporter for up to 90-95% of the invoice value.

Key Providers and Policy Structures

Export credit insurance is offered by government-backed export credit agencies (ECAs) and private insurance companies. Government-backed agencies, such as the Export-Import Bank of the United States (EXIM), support national export strategies and may cover risks that private insurers are less willing to undertake. Private insurers operate in a competitive market, providing a range of tailored solutions for commercial risks.

These providers offer different policy structures to suit various exporter needs. A common option is a “whole turnover” policy, which covers all or nearly all of an exporter’s eligible foreign sales, providing broad protection and more favorable premium rates due to risk diversification. This type of policy simplifies administration for exporters with numerous international buyers.

Exporters can opt for “specific buyer” or “specific transaction” policies. These are designed for individual, high-value contracts or for specific buyers where targeted coverage is sought. Policies vary by term length, with short-term policies covering receivables due within 180 to 360 days, common for consumer goods or raw materials. Medium to long-term policies, extending beyond one year, are used for capital goods, large projects, or services, reflecting extended payment terms associated with such transactions.