Export credit insurance is a type of insurance for firms that export goods to overseas markets. The policy protects the exporter from an overseas importer's default, insolvency or its refusal to pay for the exporter's shipments. Companies that are new to exporting may find some benefits from taking out an export credit insurance policy, but they must also be prepared for the drawbacks such policies carry.
Advantage: Reduce Financial Risk
The main function of export credit insurance is to reduce the financial risk to the exporter. The risk can come from either commercial sources, such as an importer's bankruptcy, slow payment or default on the payment terms in the import/export contract, or from political sources, such as war, political protests or revocation of the importer's license. The insurer assesses the potential for both types of losses in the transaction before underwriting the policy.
Disadvantage: Exclusions and Limitations
Exporters may find that export credit insurance is not available in all situations. Insurers may not offer policies for specific types of goods or for shipments to specific countries or businesses. When insurers do offer export credit insurance, the policy may not cover the entire amount of the shipment. For instance, a company requesting a $1 million export credit insurance policy may only be eligible for a $500,000 policy, less annual and per-loss deductible payments.
Advantage: Access to Working Capital
An exporter that carries export credit insurance can gain access to overseas working capital. The credit insurance policy shows lenders that the company is protected against potential non-payment by a customer and is a better credit risk for a substantial capital loan. Companies that carry export credit insurance can also obtain standby letters of credit, in which a bank can guarantee payment on the exporter's loans should the importer fail to fulfill the import/export contract.
Disadvantage: Default and Bad Faith
Exporters with export credit insurance may take advantage of their policies to get into export contracts that carry both higher rewards and greater risks. These policies leave the exporter vulnerable to default from the importer. The importer may also engage in "bad faith" behavior, such as delaying payment or claiming that the exporter did not deliver the goods as promised. Export credit insurance carriers will stop underwriting policies to exporters who are found to engage routinely with risky importers.
- Encyclopedia of Credit: Advantages and Disadvantages of Credit Insurance
- George Washington University: The Role and Importance of Export Credit Agencies
- Zurich N.A.: Companies Turning to Trade Credit Insurance in an Unpredictable and Debt-Laden World
- Export-Import Bank of the United States: Export Credit Insurance
- British Exporters Association: The BExA Guide to Export Credit Insurance
- Photo Credit hxdbzxy/iStock/Getty Images
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