The BExA Guide to
Export Credit Insurance
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The BExA Guide to Export Credit Insurance
CONTENTS
Foreword
Introduction
Chapter 1
What is credit insurance?
Chapter 2
Risks covered and not covered
Chapter 3
The credit insurance market
Chapter 4
Pre-credit risk
Chapter 5
When you apply for credit limits
Chapter 6
Your customer is WHO? How the insurer assesses risk
Chapter 7
The banker’s view
Chapter 8
To insure or to confirm, that is the question
Chapter 9
Claims and how to make them (succeed)
Appendix 1 Lexicon
Appendix 2 Contacts
The BExA Guide to Export Credit Insurance
Foreword
This is the fourth guide to be produced by the Association (the others
are: On-demand contract bonds, Letters of credit now updated for
UCP600, Retention of title clauses in export contracts). It covers a topic
which, like the others, we regard is important for the exporter but which
is often misunderstood. As with the other issues, there might be a
natural tendency for the hard-pressed exporter to leave credit insurance
to someone else. After all, it can be a complex subject, and it is a rather
strange form of insurance which demands more active involvement by
the insured (the exporter) than most other insurances.
As before, it is the purpose of this guide to help our members to
understand the subject and to get the best out of it. It would be a shame
for the wise exporter to seek to mitigate the risk of selling overseas by
insuring his contract and his debt, only to find that because he had
not done all that was required his claim failed and he suffered a loss
where he had thought he was protected. Like the previous guides, it
has been written in the light of hard experience. It has been written by
exporters for exporters but with invaluable assistance and contributions
from a number of our insurance and specialist members. They have
again produced an excellent piece of work.
Sir Richard Needham
President of BExA
October 2007
The BExA Guide to Export Credit Insurance
Introduction
Export credit insurance has been around for a long time. There is
evidence to suggest that in 1820 an insurer called British Commercial
issued a policy of credit insurance. Two specialist credit insurers were
established in 1852 and in 1885 the first whole turnover policy was
underwritten. By the end of the nineteenth century business was being
written at Lloyd’s and in 1918 Trade Indemnity was established. In
1919 the British Government established the Export Credits Guarantee
Department (ECGD). Despite this long history credit insurance has
always been something of a minority interest and has a special place in
the insurance market; even in its heyday ECGD insured no more than
about a third of UK exports and that heyday is long gone.
There are, of course, other tools available to the exporter who wishes
to improve the likelihood of collecting his debts. Asking your customer
to pay in advance is one. Getting your customer to have his bank issue
a letter of credit in your favour is perhaps the favourite and, in some
circumstances, you might consider having the letter of credit confirmed.
These alternatives have one thing in common: you are asking your
customer to do something. Your customer might not object or you
might be in a sufficiently strong negotiating position to allow you to do
so. This is not always the case, however.
With credit insurance you do not ask your customer to do anything
extra. At its simplest, you offer open account terms to your customer
and if he does not pay, then you claim on your insurance. Now, that is
it, in something of a nutshell. Sometimes the insurer might require you
to obtain payment security as a condition of giving cover for a certain
customer or country. But the point remains; insurance represents an
alternative to most other methods of protecting your receivables in that
you do not generally require the co-operation of your customer. This
should be welcome to most of us; it is always good to be able to say
to your customer ‘of course you don’t need to have a letter of credit
opened – I trust you to pay’. The fact that you have insured against
the risk that he might not pay is not something that need concern your
customer; he will have much more important things to think about.
Moreover, as a general principle, (and as most insurers stress) you
should rarely tell your customer that you are insured; the insurer doesn’t
want your customer to think that he needn’t pay you because you will
be able to claim on your insurance and will thus not suffer.
So, we have a technique that has been around for over a century and
one that offers the prospect of pleasing, or at least not upsetting, your
customers. Why is it not more widely used? Well, insurers tend not
to enjoy the best of reputations – the old saying about them being
happy to sell you a policy but reluctant to pay a claim is well, if unfairly,
established. Certainly credit insurance is often not a simple type of
insurance; it requires a good deal of oversight and maintenance by the
insured (the exporter) and is subject to all sorts of conditions, warranties
and goodness knows what else. In other words, there is more than
enough scope for the exporter to get it wrong. It really would be a
shame to have your claim rejected because of your failure to observe
the terms of the policy (such as forgetting to notify the insurer that
payment from the customer was late) after you have gone to the trouble
of getting your cover in place before you signed the contract, told the
insurer about the contract, and paid the premium.
The BExA Guide to Export Credit Insurance
As well as perceived user-unfriendliness, there is the feeling that the
insurer will only be willing to insure good risks, not the ones that you
want to insure. Most insurers will want to cover a spread of risks (the
whole turnover approach, about which much more later); the exporter
might not want to insure those customers with which he has been
dealing for years (or those countries with which he feels comfortable),
but it might be worth doing so, in order to offer the insurer a broad
portfolio of risk in return for a lower premium rate across the portfolio
than would apply if the exporter only offered the insurer his contracts
in the more challenging markets.
Purpose of this guide
The purpose of this guide is to explain credit insurance for the benefit of
members of the British Exporters Association. It is hoped that it might
make this interesting topic more widely understood, to the benefit
of both exporters (directly) and insurers (indirectly). It is written to
be of practical use. It is not written as a sales aid for insurers nor as
a substitute for the services of a good broker. It tries to present an
impartial explanation of the subject.
Terminology
Much of what follows does not need explanation. Some of the words
and phrases with particular meanings will be explained when they are
first used and in Appendix 1.
The ‘exporter’ or the ‘seller’ is you, the British exporter, selling goods
or services to an overseas customer. ‘You’ is the exporter. The ‘insured’
is the exporter who has bought credit insurance.
The ‘customer’ or the ‘buyer’ is the overseas purchaser of the exporter’s
goods or services. There is scope here for confusion in that insurers
will often call the exporter their customer (which, of course, is correct).
However, in this guide the exporter is the exporter (the insurer’s
customer) and the exporter’s customer is the customer.
The ‘insurer’ is the organisation that offers to take some of the risk of
your overseas trading.
The ‘broker’ is an insurance intermediary who will act on the exporter’s
behalf in finding an appropriate insurer and negotiating the terms of
cover and, of course, any claims.
The BExA Guide to Export Credit Insurance
Contributors
The work in this guide has been undertaken by a number of contributors
who are actively involved in credit insurance:
David Atkinson of Euler Hermes
Ray Bates of Euler Hermes
Sue Crooks of Siemens Industrial Turbomachinery Limited
Simon Matthews of Atradius
David Millett of RBS
Rupert Murray of Rattner Mackenzie
Andrew Neill of Newstead International
Michael Possener, export consultant
Glyn Powell of Fairfax Gerrard
Denise Rowley of British Seafood
Robert Scallon of Thales
Glenn Sexton of AIG
John Tyler of Alstom
Mark Wyatt of Euler Hermes
and particularly Susan Ross of Aon, without whose support and
encouragement this guide would not have been possible.
These good people deserve the thanks of British exporters. All views
expressed are personal.
It is hoped that what follows will be of value.
Richard Hill
BAE SYSTEMS plc
Chairman of BExA
October 2007
Copyright & disclaimer
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted, in any form or by other means, electronic, mechanical, photocopying or otherwise
without the prior permission of the British Exporters Association.
Whilst every reasonable effort has been made to ensure accuracy, information contained in this
publication may not be comprehensive and readers should not act upon it without seeking
professional advice from their usual professional advisers.
The BExA Guide to Export Credit Insurance
Chapter 1
What is credit insurance
Most people understand what is meant by insurance. They may not
know about the obligations which English law places on them as
insureds; they may not appreciate that no insurance covers everything
so that there are always lots of exclusions; they may not have read the
“small print” (foolish!) but they do understand the basic concept of
being insured.
A company is bound by law to insure certain risks, such as its liabilities
to third parties, but it can choose whether or not to protect itself in
other areas of danger. Most companies take it for granted that they
will insure their property but usually this means buildings and contents,
including stock. Rather strangely, once that stock has been despatched
to a customer and is represented by an invoice, many companies cease
to insure this particular asset (the receivables) and take the risk that
they will not receive payment for the goods they have supplied (the
credit risk). Of course, if the stock of materials is manufactured into
an item for a specific customer so it gains value for that customer but
it might become less valuable for the exporter if he cannot supply it to
the specific customer for whom it was intended. If he is unable to do
so, the exporter will suffer a loss in attempting to sell elsewhere or in
recovering materials for re-use (the pre-credit risk). This exposure to
loss, also, can be, but is often not, protected.
The purpose of insuring the amounts owed by customers, or work in
progress that is specific to one customer is, as with all forms of insurance,
to provide the peace of mind that in the event of a loss you will, more or
less, be put back into the position you were in before the loss occurred.
In the case of credit insurance, this means being recompensed for
amounts that are properly due and which the customer has failed to pay
(the credit risk) or for work in progress on a contract that is not capable
of being fulfilled (the pre-credit risk), thereby ensuring that unforeseen
events do not turn into financial disaster and ruin. For the exporting
company, the variety and extent of these potential unforeseen events is
much greater than for a company dealing only with home trade.
Credit insurance, however, is not a simple form of insurance which
you keep in a file and forget about until something goes wrong. Its
influence extends over several areas of the business and it brings with
it certain obligations and responsibilities. Credit insurance offers some
quite far-reaching and possibly unexpected benefits, too.
Nasty shocks are as unwelcome in business life as in private life. A
robbery, a fire, a flood - they all disrupt the normal pattern and cost
money. News that a customer has gone bust brings the same lurching
feeling to the credit manager or finance director as any of these other
perils. It is at such times that one of the first thoughts is “are we insured?”.
For the exporter with credit insurance the concerns will continue until
they have checked that their cover is in place and that they have been
operating within the terms of that cover. Reimbursement from the
insurer will depend on the type of cover they have purchased. If claims
are based on a high percentage of each invoice value, the directors of
the business are assured that although there will be a waiting period
before the claim is paid, the cash-flow impact of this lost income will be
substantially reduced. For companies who have bought a lower level
of cover, perhaps based on their ability to absorb a degree of loss, the
The BExA Guide to Export Credit Insurance
reassurance is that the damage to their balance sheet will be no greater
than they had provided for. It may be a benefit that this position can
be demonstrated to the company’s bankers and shareholders who will
be keeping an eye on financial forecasts and outturns. Comfort can be
shared by the sales team who might feel responsible for not knowing
about the impending collapse. Do not forget the credit manager, who
would feel both relieved and vindicated in the decision to buy credit
insurance.
Of course, if there is no apparent financial disaster with which the
customer has had to contend, but payment is simply late, the company
can concentrate on taking action to minimise a loss and salvage
whatever they can from the situation, such as exercising their retention
of title clause (see the BExA guide to Retention of Title Clauses in Export
Contracts). If the cause of the bad debt is the customer’s financial
difficulties, then referring the account to the insurer’s collection
department can again relieve the exporter of the time-consuming job
of debt collection.
Such peace of mind comes at a cost. A comparison of the cost of
insuring as against taking 100% of your own bad debt losses might
include:
With credit insurance
Without credit insurance
Premium
Bad debt reserve
Reduced Bad Debt reserve (providing
for the uninsured percentage)
Purchase and assessment of credit
references
Credit limit charges for third party
assessment of customer
Debt collection fees
Management time for administering the
policy
The exporting company which does not insure will save the premium
and other related charges, which can be substantial, but it will have to
build in more for credit and other information bought from third parties
and will undoubtedly use more internal resources approving credit limits
and dealing with debt collection. A provisioning policy will need to be
established based on previous losses, account sizes, spread of risk, and
expectation of future loss. This will differ for all companies, but the level
of bad debt reserve will be far higher for the company which does not
insure. A good broker will help with an analysis like this which can often
produce results which challenge some conventional assumptions.
It is often said that payment of credit insurance premium attracts tax
benefits. This true as, normally, any premium is fully allowable against
taxable profits. However, so is any specific bad debt provision charged.
The actual benefit is obtained over the ‘general’ provision, that which is
not related to a specific dubious debt. Currently the general provision is
not tax deductible, whereas the entire insurance premium would be.
The relationship between credit insurance and finance is also worth a
closer look. The existence of credit insurance can be a positive thing.
The simple fact that you insure your receivables may be regarded as a
plus point by your bank, possibly reflected in larger or slightly cheaper
facilities. In fact, once they know you have it, your bankers may not wish
to see you decide to cease insuring. Some institutions offer financial
products specifically tailored to take your credit insurance into account
and create an attractive facility for exports (see Chapter 7). Other bank
The BExA Guide to Export Credit Insurance
products, however, combine debt protection with finance in the form
of “non-recourse” facilities and can make the need for credit insurance
superfluous.
Being part of the community of companies that insure their export sales
has further benefits. Insurers produce country reports and trade sector
reports. Insurers and analysts are sources of practical information on
markets and companies and warn their customers and compare notes
with each other on deteriorating risks. They are usually willing to offer
their views on how to approach a new market or at least to give advice
on what to beware of. A new market and customer to you is likely to be
a territory your insurer has covered for years and your customer might
be similarly well known with a trouble-free (or perhaps not) payment
record.
Indeed, refusals of cover that at first appear the greatest irritation and
constraint in the routine of policy administration, may, in reality, be
the biggest financial benefit of all to the insured exporter. The “No’s”
might seem to limit sales, but they would prevent time being wasted on
an account which would never be paid. It can be harder to accept the
refusals where you have your own opinion of the customer concerned,
which may include your trading history.
Many companies have successfully used the expertise of their insurer
to expand their range of export markets and increase turnover. Where
contract sizes are large and the investment is great, the insurer’s
approval of cover can be an absolute pre-requisite to the business
being done at all. You will usually find an insurer willing to listen and
exchange information about a customer, and it is fair to say that most
of the strongest advocates for credit insurance will be those who get
most involved in it and therefore get most out of it. These discussions
with the insurer often lead to a structure which can be underwritten,
maybe not simply open account or the terms the customer originally
requested, but nevertheless workable for all parties.
That is not to say that things cannot go wrong. If your claims mount
up, it can be surprising how some insurers do not take on board your
argument that you have only suffered losses because of the insurer’s
lax approach to underwriting! Premium rates will go up, as they will
if the climate of risk worsens in the markets to which you sell. You
can find yourself in the unpleasant situation of facing either a steep
increase in premium costs or abandoning insurance but facing a high
probability of further losses. This is an uncomfortable situation, but not
as uncomfortable as having suffered the losses without the benefit of
the insurance in the first place.
The exporter as buyer
The use of credit insurance in international trade is something that every
company should consider. For, even if you do not choose to insure
your sales, the companies you buy from, whether they supply raw
materials, machinery or office stationery, may have chosen to take out
credit insurance on you. You are therefore, in the eyes of the insurers,
a buyer and a risk. It is possible that at some time you will be asked
by an insurance company to supply information about your business.
This is likely to be financial information such as your annual report and
accounts and may well include a request for management accounts. If
the information is sensitive, you may prefer to invite one of the insurer’s
analysts to see your business and study your finances without taking
The BExA Guide to Export Credit Insurance
papers away. If there have been changes of ownership or structure to
the business, the insurers will be particularly interested.
There is little doubt that it is in your best interests to allow insurers to
attain a good level of comfort with your business. As a result you may
find suppliers amenable to offering you longer credit terms or higher
volumes of business, if they in turn are being granted generous credit
limits on your company by their insurer.
Remember, well-run companies tend to be more profitable and suffer
fewer unforeseen losses, because their processes help avoid loss in the first
place or have the capability of corrective action to minimise the losses.
Credit insurers have, over decades, learned this from bitter experience.
Their understanding of you, and your systems and your ability to fulfil
your contract obligations is definitely of interest to them.
What is credit?
Whenever a supplier parts with possession of goods or carries out
services for which he has not received payment in full, he is giving credit,
whether for one day, one week or 5 years. Put like this, the supplier is in
a weak position if the payment he is waiting for does not arrive. Under
English law he is not even entitled to stop further deliveries or services
unless he has included this right in his contract; it is not an automatic
right, even if payment has been improperly withheld.
…and what is credit risk insurance?
Credit risk cover will protect against the non-payment to the exporter,
subject to the small print in the policy. The amount and timing of
the claim paid to the supplier by the credit insurer depends on several
factors, the main one being the reason behind the non-payment. This
is because the usual wording of a credit insurance policy lists the events
which are covered; which event has occurred leads to a decision on the
percentage of the loss which will be paid and how long the exporter
will have to wait for the claim to be paid. One hundred percent of
an exporter’s loss is rarely paid because the credit insurer wants the
insured exporter to have a residual financial interest in collecting the
debt. The usual figures are 90% or 95% depending on the event giving
rise to the claim and any policy excess. Similarly, the policy will have
a waiting period (typically four or six months, but may be longer for
riskier countries) which is intended to allow time for the event to correct
itself, with the exporter’s assistance if possible. The one exception is
the insolvency of the customer, which cannot be corrected, so there is
generally no waiting period.
… and pre-credit risk insurance?
Of course, if you are supplying equipment which is bespoke for your
customer and the contract is frustrated before you can despatch it or
invoice your customer, then you will have a pre-credit risk exposure.
For this reason you can choose to insure a contract from the date at
which it becomes effective (thus covering insured events during the
manufacturing or pre-credit period (see Chapter 4 for more detail)
rather than only to insure invoices as they are raised or the goods are
despatched (the credit risk).
Types of insured event
Credit insurance policies identify the insured events by listing them.
They can be divided into two main categories, referred to as buyer or
commercial risks and political or sovereign risks.
The BExA Guide to Export Credit Insurance
Buyer risks are events associated with the customer which lead to nonpayment, usually insolvency or extended failure to pay.
The second category of insured events, political risks, include events
which are the acts of governments, such as cancellation of export
or import licences and shortage of hard currency. This category can
include certain natural disasters such as earthquakes and floods. None
of these events is covered unless they actually prevent the contract from
being performed. It is not enough, for example, for an event merely
to make it more difficult for the exporter to perform the contract;
performance must be prevented, at least in part, and you must suffer a
loss as a result.
There is a very important form of cover associated with public buyers;
these are governmental or quasi-governmental buyers which have been
specifically accepted as such by the credit insurer. This is classified by
the insurer as a political risk. Typically, a claim will be paid if a public
buyer fails to comply with its obligations under the contract. This is
clearly very broad in its application but to take the benefit of it, the
contract must be clearly and precisely expressed. Of course, this is
good advice in any event, regardless of the insurance.
The insured risks are covered in more detail in Chapter 2.
Look to your contract
An unusual feature of this type of insurance is the way in which the
contract and what it says can have a dramatic effect on when, or even
whether, a claim will be paid.
For example, your terms of payment. Suppose the payment clause
states that final payment must be made 100 days after goods leave
the UK. Despatch from the UK is generally within the control of the
exporter so, with proof of despatch, an unpaid exporter can expect
payment one hundred days later. By contrast, if the payment clause
allows for final payment 30 days after the acceptance of the goods by
the customer in his country, it may never be possible to submit a claim
for non-payment. The shorter credit period (of 30 days plus shipping
time) may look attractive, but the second version of the payment term
actually introduces three extra levels of risk for the exporter, disguised
in the wording.
• Delivery: What if your precious goods never arrive at the customer’s
location in his country? They may be lost in transit. This risk can be
insured separately (it is not covered by the credit insurance) but who
was responsible for taking out this insurance ­ what does the contract
say? If it was stated to be one of the customer’s obligations, what
happens if he did not do it?
• Import licence: The next level of risk is associated with the possibility
of problems in getting the goods through Customs in the customer’s
country. Was an import licence or other permit required, and if so,
did the customer obtain it? The exporter will not usually be able
to obtain an import licence. Furthermore, in credit insurance, it is
cancellation of an import licence that is covered, not the failure to
obtain it. So you need to write into your contract that this area is
your customer’s responsibility.
• Acceptance: The customer’s requirements for accepting the goods
must be spelled out in the contract. Suppose the customer has
changed his mind about buying the goods and never carries out the
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The BExA Guide to Export Credit Insurance
acceptance procedure; in anticipation of this possibility, have extra
safeguards been built into the contract?
Payment terms based on acceptance of goods or services by the
customer in his own country give rise to the highest level of risk for
an exporter and are unwise commercially as well as from the credit
insurance point of view. As a general principle, this type of payment
clause involving so much outside an exporter’s control is best avoided,
but a risk assessment may indicate that the extra risks can be accepted.
A customer in the EU well-known to the exporter with a steady pattern
of purchases may provide appropriate comfort.
An even better solution lies in improving the wording in the contract,
in effect by combining the two types of final payment clause. If the
higher risk version has a “long stop” period added, the uncertainty is
removed. Thus, if the payment clause states that the final payment will
be made 30 days after the acceptance of the goods by the customer in
his country (high risk wording) but in any event no later than 100 days
after the goods have left the UK, the sting is removed and the exporter
will be able to demonstrate that 100 days have passed and demand
payment or make a claim on his insurance. All the extra risks still exist,
but they will not allow the payment to be delayed beyond the stated
“long stop” period. The point is that if you don’t know when you
should have been paid you will not know when you haven’t been paid,
and if you don’t know this, then you will not be able to demonstrate to
your insurer that you haven’t been paid.
More extensive contract provisions will allow full advantage to be gained
from a credit insurance policy. For example, if an export licence or an
import licence is required (see Chapter 4) or if payment is to be made
by letter of credit, a clause that delays the coming into effect of the
contract might be used to avoid the difficulty of either being obliged
to perform a contract which would be illegal because of the law of the
exporter’s or the importer’s country, or undesirable because the letter
of credit had not been received. For more details on this point, see the
BExA guide to letters of credit (updated for UCP600). Other safeguards
can be added in the effectiveness clause but you should put a limit to
the time that is available to both you and the customer for fulfilling
these pre-conditions. If all the requirements are not fulfilled within the
time limit (or any extension agreed between you) it is better to know
that there are insurmountable problems so that the contract can be
called off before extensive expenditure has been incurred, usually by
you.
Although the primary aim for writing a contract is that it should be
clear, precise and unambiguous, the very important requirement for
delivery is often expressed by initials such as FOB, CIF and so on. This
is unfortunate because the obligations associated with these initials can
differ between countries and even between ports in the same country.
In the USA, the Uniform Commercial Code defines several of these sets
of initials in an entirely different way from elsewhere in the world. It has
been proposed that these definitions should no longer be used but as
this change has to be approved by each state, progress is slow. To be
clear about what these initials involve, reference should be made in the
contract to INCOTERMS 2000, a booklet produced by the International
Chamber of Commerce (ICC). This refers to 13 different sets of initials
and defines the obligations of the customer and the obligations of
the exporter under each one. A statement in the contract that, for
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The BExA Guide to Export Credit Insurance
example, the exporter will deliver the goods FOB UK port in accordance
with INCOTERMS 2000, is all that is necessary to incorporate the
INCOTERMS definition of FOB.
A final example of how a contract clause can help to increase the
benefit of credit insurance involves an important exclusion to a credit
insurance policy. If a customer claims that he is justified in not paying,
most insurers will not pay a claim until this dispute is resolved. It is
therefore greatly to your advantage to be able to resolve the dispute
speedily and fairly. You will probably attempt negotiation first but if this
is unsuccessful, you may need to resort to the legal process. However,
the last thing that you may want is to litigate in the courts of your
customer’s country. The alternative is to use arbitration. Although this
can in theory be arranged at the time of the dispute, relationships may
then be so bad that it may not be agreed by the parties. It is much
better to anticipate the possibility of this situation and to include an
arbitration clause in the contract from the beginning.
The ICC has extensive arrangements for international arbitration and
publishes a booklet on its rules. It even recommends a brief arbitration
clause (in several different languages) which it is wise to use, as there
has been considerable litigation on the meaning of different versions of
arbitration clauses. A neutral country should be chosen (Switzerland
is often used) and stated as the place of arbitration. It is necessary to
specify in the contract which country’s laws apply and preferably which
language applies. If the rules and place of arbitration as set out in the
contract are truly neutral, this may well persuade both parties to come
to a negotiated settlement of the dispute and, we would hope, allow
the exporter to be paid. Another advantage of arbitration is that once
an award has been made it is automatically enforceable in the courts of
many countries, whereas in many countries courts will not automatically
enforce a judgment of a foreign court, potentially necessitating the case
to be proven again.
It is often said that credit insurance does not make a bad contract good.
Also, that the credit insurance is only as good as the underlying contract.
The essential point to remember is that if you have no right to be paid
under your contract then you will not be able to sustain a claim on your
credit insurance if you are not paid. The purpose of the insurance is to
place you in the same position as if you had not suffered an insured loss,
to recompense you for a substantial percentage of that loss. You will
not make a profit from the insurance, nor should you expect to.
Managing your policy
Someone within your company has to be responsible for buying the
insurance and for the procedures required to comply with the terms
of the policy – where should this responsibility sit? The authority to
incur costs such as insurance premiums and the responsibility for bad
debts might fall naturally to the finance side of the business. On the
other hand the operations or shipping department is probably more
familiar with invoicing and despatch. The all-important customers,
which are the subject of the insurance, are probably best known to the
sales department. Here, then, is the first dilemma and an illustration
of the way in which credit insurance has an impact on the whole
business. Some companies either have or create the position of Credit
Manager, Export Finance Manager or Risk Manager, and that can be a
way of drawing some of the threads together. In smaller companies
the managing director may take the responsibility; in others it will be
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the finance director. It is because credit insurance affects so many areas
of the business that it is important for there to be an involvement at
board level.
It should be a simple task to set out the advantages and disadvantages
of credit insurance, but, true to the perverse world to which exporters
are used, aspects that look like disadvantages can really be benefits,
while certain features promoted as benefits can actually be drawbacks.
The procedures that are required to operate a credit insurance policy
may sound like an administrative burden, but what they actually create
is the basis of credit management procedures. Many companies who
would not ascribe to themselves the sophistication of a formal credit
procedures manual are in reality operating to a sensible set of decisionmaking rules simply by virtue of complying with the requirements of their
insurer. Ensuring that you have a credit limit for every buyer, that there
are maximum credit terms and that overdue accounts are highlighted
and reviewed are fundamental principles of good credit management.
By additionally taking out credit insurance and observing its terms and
conditions, a good standard of credit control may be achieved.
Amongst larger companies, many a board of directors has used the
straightforward requirements of a credit insurance policy to impose
common practices across subsidiaries and to bring a new acquisition
into line with corporate policy. In the run-up to a flotation, companies
include the fact that they credit insure in their prospectus as an additional
indication of good governance.
Of course, there are companies who object to the disciplines of the
credit insurance framework. They may not necessarily agree with
their insurer’s view of a maximum credit limit, their attitude towards a
particular overseas market or the maximum length of time the insurer
is willing to be on risk. Such independence of spirit, knowledge and
confidence is essential to business, and there is a good argument to be
made for a dynamic relationship between insurer and insured.
If you believe that your insurer has got it wrong in some way (you
will have a better understanding of your trade than does the insurer,
for example), you should be willing to challenge their opinions. It is
generally a good idea to do so in a constructive manner rather than
simply to moan about the insurer not understanding your business. Just
as you will wish to benefit from the advice and underwriting knowledge
provided by your insurer, they should be willing to listen to your point
of view. This is important. You can expect your insurer to know the
business of credit insurance. Your insurer should recognise the fact that
you will know your business better than they do.
Renewing your policy
Towards the end of your policy period (usually 12 months, sometimes
longer) some time needs to be set aside to gather together information
on the value of business that has been insured and on what losses there
have been and the value of claims the insurer has paid, plus what the
credit insurance has cost over the policy period (premium, charges for
credit limits and debt collection fees). In addition to keeping track of the
overhead costs, this will help in an assessment of whether to continue
to insure with the current provider, insure with an alternative, or to
take more risk on your own account. Keeping your own figures will be
invaluable in the renewal negotiation over the appropriate premium
rate for the next period of cover. The insurer will have accurate
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The BExA Guide to Export Credit Insurance
information on what they have paid you and what you have paid them,
both in premium and recoveries of claims. You may well be asked by
the insurer prior to renewal to summarise your sales turnover for the
period, and to forecast your turnover for the period ahead. It will make
this job much simpler if computer reports are set up at the beginning,
to track the figures, preferably, by market and by customer.
The insurer needs to be kept up to date with changes in your business
to ensure that the terms of the cover continue to match the pattern of
trade. For example, the cover might need to cater for a new product
line being sold on longer credit terms than normal or to new markets. A
face to face meeting with the insurer and some internal discussions with
colleagues will all be part of this annual process. Renewal documents
need to be checked and finally, the Credit Manager will need to inform
colleagues of any changes in the cover and take account of the new
levels of projected expenditure.
The role of the broker
A group of specialist advisers exist whose aim is to assist the exporter
in the area of credit and political risk insurance. They are credit
insurance brokers. They do not take the non-payment risk or pay claims
themselves; rather they act as an intermediary between the exporter
and their insurer.
A broker can be drawn in to the process from consideration of the initial
strategy to be adopted, through to comparing and selecting the most
appropriate form of cover and the best insurer for the job. They can
inform and train staff on the way the policy works and the operational
routines involved. Crucially, they can bring their experience to a case
for a high credit limit, or for a claim to be paid in circumstances which
are not cut and dried. If you have unexpected resource problems, they
can sometimes help to cover the gap. And they can either hold your
coat during a renewal negotiation or conduct the whole process for
you.
The broker’s position in the credit insurance market is a subtle one,
however, and the importance to them of their reputation and their
relationship with the fairly limited number of insurance companies
which exists in the market today has to be included in the equation.
The insurer usually pays the broker a proportion of the premium you
pay, and most insurers will not charge less if you do not use a broker. In
that respect the decision whether to enlist the services of a broker is not
a difficult one. The difficulty comes in selecting the right one.
The value you will derive from a broker depends on the quality of the
individual broker you appoint and the nature of the relationship you
wish to have with her or him. When the mix is right, a broker will be a
valuable extension of your eyes and ears, broadening your knowledge
through their constant contact with the wider market of insurance
options and clients, and enhancing the relationship your company
has with your insurance provider, by representing your interests to
the insurer and helping you get the most from the services the insurer
provides
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The BExA Guide to Export Credit Insurance
Chapter 2
Risks covered and not covered
You are in business, you don’t need to be told about risk. Every
contract you sign lays you open to risk. Some of it is known, or at least
quantifiable. Some of it has the capacity to come as a nasty surprise,
what has memorably been referred to as ‘unknown unknowns’. Clearly,
for the unknowns there is only so much you can do – perhaps you
have a company policy on risk mitigation, perhaps not. Either way, you
should at least prepare for the known unknowns.
You insure your physical assets against loss from fire. You probably lay
off as much foreign exchange risk as you can with your customer or
your bank. How do you rate the payment risk in your book of export
customers? If you are selling to an established customer base in France
or Germany and no single contract has a value of more than 0.1% of
your annual turnover, you might feel relaxed about this exposure. If
one customer represents 30% of your annual turnover, you might feel
less relaxed. As you move down the relaxation curve (or hammock, as
it might invitingly be termed), so you will be more inclined to engage
with external bodies which will offer to relieve you of some of the risk.
Two principal routes open up for consideration: letters of credit and
credit insurance. The benefits of letters of credit (and their confirmation)
and credit insurance are compared in Chapter 8. In the context of this
guide the confirmation of letters of credit represents an alternative to
the use of credit insurance. This is a vast over-simplification but for
the moment it will do. What follows concentrates on credit insurance
simply as a risk mitigation tool. That it can be used for a number of
purposes and in a number of ways, some of which are explored in
Chapter 7, is to be welcomed.
It is a well established truth in commerce that there is no risk-free
transaction. Even selling to an undoubted customer like the UK
government carries risks, including contract cancellation. However,
credit insurance can cover some of your export risks effectively.
The principal risks which an overseas contract carries might be
characterised as:
Risk
•Customer bankruptcy or liquidation
•Late (or non-) payment
•Rejection of goods
•Funds are paid by the customer but
not transferred by his bank or the
central bank
•The customer’s country repudiates
its foreign obligations
•The customer cancels the contract
or refuses to sign an acceptance
certificate required for payment
•Seizure of the goods by a
government or nationalisation of a
local entity
•War, civil unrest, natural disaster,
tidal wave
Insurance terminology
•Insolvency
•Protracted default
•Performance risk (not usually covered
by credit insurance)
•Transfer risk (political risk)
•Contract frustration (a political risk)
•Contract frustration (only covered
under political risk if the customer is a
public buyer)
•Confiscation (usually covered by a
separate policy)
•War, act of God (covered under most
political risk policies but wordings
vary and there are exclusions)
•The customer’s country refuses to let •Moratorium (a political risk)
payments be made
•Marine cover
•Loss or damage to goods in transit
•Property, marine, fire or theft cover
•Loss or damage to goods in
warehouse
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Within the credit insurance field there has arisen a distinction between
two classes of insurance covering the commercial risks (insolvency or
default of buyer) and political risks (the rest). To the credit manager
or sales director of the exporter, however, the difference between the
two is at best moot, and the outcome is the same – you are not paid.
It is therefore important to ensure that your insurance covers the risks
involved, whichever they are. Ideally your insurer provides cover against
both classes of risk.
Let us consider each of the above in turn.
Commercial risks
• Customer bankruptcy or liquidation (insolvency)
It should be very straightforward to substantiate a claim if your
customer fails to pay because of his bankruptcy or insolvency – but
we all know that life is not always as clear-cut as we would like,
and there are many circumstances in which the buyer is insolvent in
practical terms but not formally so. In simple terms, if a liquidator,
receiver, administrator (or whatever the local term is) is appointed,
the insurance company will normally pay a claim, so long as you
can prove that the amount you are owed has been agreed by the
insolvency practitioner (so that you will be eligible for any dividend
that is eventually distributed).
In certain circumstances, the customer is effectively insolvent, but not
formally so. Many policies will only pay out if the customer is forced
into a recognised insolvency process, which often means that you,
the exporter, must institute legal proceedings to do so. In certain
circumstances, the insurer may entertain a claim as ‘constructive
insolvency’ where the customer is not formally bankrupt; for
example if to commence the insolvency process would be ill-advised
or impractical. In other cases, the insurer does not want to force the
insolvency of the customer for commercial reasons of its own, such
as the parent being a major client of the insurer world-wide. Hence,
talking to the insurer is important.
In the US, we have to consider a particular form of bankruptcy,
known as a ‘chapter 11 filing’. A company which is near insolvent
can seek court protection to prevent its creditors from bankrupting it.
A company may also seek protection in order to avoid the effects of
litigation or other threats to its activities; in these circumstances there
may be no indication of financial weakness. The court will require
the management of the company to file a plan for recovery and, if
the court accepts the plan, then the company will be able to trade
with the protection of the court, perhaps for years. The company is
not insolvent according to the law of the United States, but it will not
have to pay debts which pre-date the application to the court until it
leaves its protected status. Similar systems of bankruptcy protection
have been established in other countries – such as in Germany where
the motivation is avoiding job losses.
• Late (or non-) payment (protracted default)
Sometimes the customer is not insolvent but, despite the fact that
the contract has been performed properly, he will not pay. This
is protracted default and may give rise to a claim under the credit
insurance. Typically, the policy will specify a period of between 90
and 180 days after the due date, after which the customer is deemed
by the insurer to be in default. As long as the customer hasn’t given
a valid reason for not paying (eg saying that your kit doesn’t work),
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The BExA Guide to Export Credit Insurance
you are following instructions on debt collection and there is not a
continuing contractual dispute, the insurer will pay your claim. There
is a catch: if you claim, it is assumed that the customer is effectively
insolvent. You would not be expected to claim for your loss and
then re-start commercial relations with the customer – unless you
share the new income with the insurer as salvage.
• Rejected goods (performance risk)
This is a difficult area. Most insurers only pay claims for this event if
the failure to accept the goods arises because the customer is near
insolvency. In a contract with a government entity or state owned
company, it may be covered as a public buyer (political) risk.
Political risks
• Funds are paid by customer but not transferred by his bank or the
central bank (transfer risk)
This is one of the main political risks. Your contract is denominated
in a hard currency such as sterling or US dollars, and your customer
pays in his own currency and applies for the foreign exchange,
but your customer’s country does not remit funds, due to political
interference or a shortage of foreign currency or a moratorium of
payment. The insurer will pay a political risk claim. The policy
will not, however, cover exchange risks, where the hard currency
appreciates in value in relation to the local currency and thus the
local currency deposited is insufficient to convert to the full hard
currency debt (when it is eventually released and converted). This
will generally be a risk for the exporter to bear.
• The customer’s country repudiates its foreign obligations (contract
frustration)
This is a good example of the sort of political risk for which we buy
insurance. This catch-all can cover the imposition of sanctions and a
variety of other government actions.
• The customer cancels the contract or refuses to perform his
obligations such as opening a letter of credit on time or signing an
acceptance certificate required for payment (contract frustration)
This cover is usually only provided where you are selling to a
government (public) buyer and it is unlikely that you will be able
to take legal action. It is not normally available for commercial
customers.
• Seizure of assets by a government or nationalisation of a local entity
(confiscation)
This specialist political risk is not usually insured by a credit insurance
policy (which typically will insure your contract of sale) but can be
covered with political risk cover (against the risks of confiscation,
expropriation and nationalisation, called CEN cover).
• War, civil unrest and similar (war, act of God)
This may include natural disasters such as earthquakes and tidal
waves (still sometimes known as acts of God) and may be covered by
a credit insurance policy, political risk insurance or marine insurance
depending on the cause and the timing of the loss. Loss arising from
war between two or more of the five permanent members of the
UN Security Council (China, France, Russian Federation, UK, USA)
is generally excluded from cover, although Lloyd’s insurers are now
starting to remove this exclusion from their policies.
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The BExA Guide to Export Credit Insurance
What is most important for the exporter is to analyse the risks inherent
in the contract and determine which are those which prudence (or
company policy) would make it appropriate to mitigate, and to seek
cover accordingly.
What credit insurance doesn’t cover
This section could equally well be entitled ‘Some things that credit
insurance doesn’t cover’. The clue is in the name: credit insurance.
Being insurance it offers cover against loss arising only from the named
events (also called causes of loss and insured perils, both quite descriptive
terms). It follows that loss arising from an event that is not listed in the
policy is not covered. So, with this caveat in mind, some of the events
that you might expect or hope would be covered by credit insurance,
but are not, are set out below.
• Political risk cover (if you have bought commercial risk cover only)
If you are exporting only to Europe or North America, you may
decide to insure only against commercial risks and thus reduce the
premium spend. We all hope that war and contract frustration are
remote risks within the EU, and it is true to say that a political risk
event is a less frequent occurrence within the EU than elsewhere, but
it does exist and should not be ignored. It is worth discussing your
contract terms and the terms of cover in detail with your broker and
insurer in such cases to evaluate the perception of risk and the cost
to your organisation.
One exporter, selling parts for defence equipment to an EU member state,
was faced with the very real possibility that, following a general election
and change of government in the customer’s country (the new government
included a party which had campaigned on the basis of cancelling the
purchase of the equipment), the order would be cancelled when manufacture
was in progress. Fortunately, the export department had insisted on insuring
against this risk. Also fortunately, the contract was not cancelled.
Britain used to have a thriving business exporting beef to France. When the
BSE “mad cow disease” crisis in the 1990s was unfolding, British exporters
had meat in transit that had passed health inspection. This meat was turned
away at French customs by French farmers. This action was deemed to be
a political loss. Some exporters who had insured only against commercial
losses found themselves seriously out of pocket.
• Cargo loss
If your goods are lost at sea, can you claim on your credit insurance?
Generally, the answer is ‘no’. However, if payment is contingent
upon delivery FOB (Free on Board), then as you have fulfilled your
part of the bargain, the customer should pay. If he refuses, you will
need to take him to court. If your terms are FOB as standard, you
may wish to investigate through your broker buying “seller’s interest
insurance” to cover the risk that your customer has not bought
adequate cover for the transit. It would also be prudent to ensure the
marine insurance covers the goods from warehouse to warehouse,
ie the whole journey, as many only cover the carriage from port to
port, and it might not be entirely clear just where the damage or loss
actually occurred. Remember that according to INCOTERMS 2000,
it is not just with FOB terms where the risk in the goods passes on
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The BExA Guide to Export Credit Insurance
crossing ship’s rail at the port of loading. A very clear and helpful
wall-chart giving details of both the customer’s and the exporter’s
obligations under the INCOTERMS delivery definitions is available at
a small cost from BExA – see the contact details in Appendix 2.
When you are delivering to the customer’s country DDU or DDP (to
ensure that the goods are kept under your control) and the goods
are damaged in transit, then of course the cargo insurance claim will
be yours to negotiate, and the customer will not be invoiced because
you have not delivered. In any event, it is the cargo insurance that
will pay you, not the credit insurance.
• Terrorism
Today’s businesses need to consider their location and the risk of
a terrorist attack, including how it could affect operations, eg loss
relating to the direct act but also loss due to business interruption
following an incident. Terrorism insurance has become a specialist
area and specialist advice should be sought from your broker. But
how would a terrorist incident - eg sabotage, contamination, material
damage - affect an export sale? It would depend upon the terms of
your contract. The credit insurer will only pay a claim if the loss has
been caused by an event provided for in the policy. As with other
types of insurance, loss arising from radioactive contamination is a
standard exclusion in credit insurance policies.
• Financial guarantee
Credit insurers are regularly asked to cover financial risks that are not
related to an underlying trade transaction. Very few credit insurers
have the specialist reinsurance to allow them to underwrite this
non-trade risk. Typical enquiries include the financing of property
purchase and construction projects and the risk of non-payment
of business loans, and even the finance of films. Too many credit
insurers have had their fingers burnt in these areas to encourage
them to undertake this line of insurance again.
• Agents’ fees
Many exporters employ representatives (agents) in overseas
territories. Credit insurers typically exclude the agent’s commission
from claims. In the insurer’s view, you should only pay the agent
when the customer has paid in full. So, if you are not to suffer
the loss of your agent’s commission in the event that your customer
doesn’t pay, you will have to choose an agent who can work on
this basis and who will assist you in chasing your customer for any
overdue payments. Not such a bad idea, really.
Bear in mind, however, that some countries’ laws do not permit del
credere agents, such as Italy, where you are obliged to pay your
agent regardless of whether of not you are ever paid.
• Commercial disputes
Credit insurance covers fortuitous loss. If you have not performed
your obligations under the contract, you may not be able to establish
a debt that is due to you. On the face of it, it is an easy excuse for a
customer to claim “it doesn’t work, so I will not pay”, and you may
need to obtain an independent report (eg from a surveyor) to support
your view that the goods comply with the terms of the contract. It is
important also to allow in the contract for the possibility of a dispute
and to build in adjudication or arbitration procedures (see Chapter
1). Certainly your insurance policy will contain a clause to the effect
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The BExA Guide to Export Credit Insurance
that if the customer disputes his obligation to pay you, then the
insurer will defer admitting liability until you have established the
customer’s liability (perhaps having to go to arbitration or to court)
to the satisfaction of the insurer.
If your customer raises a dispute, with or without good reason, you
should advise your insurer without delay. It is possible that your
customer has run out of money and is unable to pay you and that the
dispute is simply a smokescreen. If your insurer receives reports of
disputes from other insureds at the same time, he may well conclude
that your customer is raising spurious disputes as a way to avoid
making payments which he cannot afford. So, don’t delay reporting
an overdue payment to your insurer simply because your customer
says that your kit doesn’t work.
The fact that your policy says that the insurer will not admit liability
until any dispute is resolved (to the insurer’s satisfaction) does not
necessarily mean that you will have to go to court or arbitration to
satisfy your insurer. They will decide whether they think the dispute
is genuine in the circumstances of each case, and this decision will
be influenced by the relationship that you have with them.
• Currency fluctuations
Insurers tend to cover you in the currency that you use for your
financial accounts. For example, if your policy is in sterling but the
contract in US dollars, it is typical for the insurer to cover you for the
sterling value of those US dollars, using rates of exchange relating to
the date of each invoice (or date of contract if you buy pre-credit risk
cover). In the event of loss, your claim would be settled in sterling,
using the same rate of exchange. If you or the insurer subsequently
recovers part or all of the debt from the customer in US dollars, then
those US dollars will be converted at the rate of exchange current
at the time of the recovery. However, for large contracts it may
be worth considering arranging cover in the contract currency, thus
eliminating your exposure to the risk of loss from the fluctuation in
the values of the two currencies.
• Multiple insurances
English law makes it clear that you can only claim once, even if you
have several policies covering the same loss. Most credit insurance
policies go further, in that they say that if you have other insurance
(eg the goods are lost at sea, payment was due 30 days from delivery
FOB, but you prudently bought “seller’s interest” insurance) then
that other insurance must be tried first.
• Insolvency of the remitting bank before the monies are transferred
This is not the same as the insolvency of your customer. If the
remitting bank is state-owned, it will be covered by political risk cover.
If not, it represents an additional layer of commercial risk which will
not normally be covered under credit insurance. The classic solution
for this risk is to obtain a confirmation from a UK-based bank that is
subject to the rigours of FSA regulation. Of course, you could just
pursue your customer for payment under the contract and let him
get his money from the insolvent bank.
• Fraud
Fraud is not covered by credit insurance. It may be covered by
marine insurance as theft, but it is incumbent on the exporter to
check the bone fides of his customer. A clear case of caveat vendor.
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The BExA Guide to Export Credit Insurance
What is not covered as standard but can be added
• Confiscation cover
If your method of exporting involves holding stocks of goods
overseas, eg spare parts, or if it involves taking construction plant
overseas, you should have this noted on your credit insurance policy
or credit limit. If the country you are delivering to is not one you
feel comfortable with (eg it is outside the EU), you might also wish
to consider buying separate confiscation (CEN) cover for the risk
that your equipment or goods are taken over by the customer’s
government or you have to abandon them for political reasons.
• Bond unfair call
You can add cover for the risk of the unfair calling of bid bonds and
contract bonds to your credit insurance; but it needs to be specially
negotiated. This cover is designed to provide protection against
on-demand bonds being called unfairly, ie when you are not at fault
under your contract. Despite its name, however, the cover includes
protection against fair calls that arise from a political event that has
frustrated the contract. There is a huge advantage in buying the
cover from your credit insurer, since you will have more bargaining
power if the risk deteriorates and will not find yourself seeking
guidance from two insurers, each of which might require you to
take contradictory action; indeed, this also avoids the risk of loss for
you if your credit insurer requires you to take action that precipitates
the calling of your bond. Such a policy does not cover the cost of
raising the bond – you will still have to make arrangements with the
bank or surety company for that.
BExA has published a Guide to On-demand Contract Bonds. It aims
to explain the ins and outs of bonds. If you are not familiar with
contract bonds, you might wish to have a look at the guide. It is
available from BExA (see Appendix 2) and can be downloaded in
PDF format from the BExA website (www.bexa.co.uk).
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The BExA Guide to Export Credit Insurance
Chapter 3
The credit insurance market
Export credit insurance policies are designed to protect the exporter
against the commercial and political risks of trade and can provide
cover for all but the most difficult markets. Your policy should recognise
and support your contracting methodology as well as accounting
for the vagaries of the markets to which you are selling. Usually the
policy will give additional support in the form of information provision,
debt collection and loss recovery advice, to enable you to trade more
comfortably in unfamiliar markets.
A manufacturer of plastic payment cards had been trading with buyers in Africa
but on a strictly pro-forma basis. It was decided to expand into new markets but
the company was unable to do so with its existing payment arrangements. The
directors did not think a credit insurance policy would cover African markets on
open account terms. To their surprise it did, and they were able to expand their
operations safe in the knowledge that they would be paid if their buyers failed.
Indeed their credit management discipline is now such that they will only trade
with a customer if a credit limit is obtained from the insurer.
Domestic credit insurance policies are designed to insure companies for
business conducted within their own country. Thus they cover only the
commercial risk. Whilst domestic credit insurance is not entirely relevant
to this guide, a multinational exporter with subsidiaries overseas would
be wise to buy cover for the local sales since, in the end, the impact on
the group’s finances will be the same.
For export business too, it is possible to insure just commercial risk
eg for EU trade, (see Chapter 2). These policies are very similar to
domestic policies in that only commercial risks (insolvency and default)
are insured, but differ in that they recognise the nature of international
trade and the additional issues that this raises. For example, retention
of title is workable in Germany but less so in France.
The price of cover will vary according to your loss record and also
according to the mix of markets to which you sell, and the terms on
which you sell. Export contracts will of course take varying lengths
of time to perform and so the associated horizons of risk (the period
during which the exporter, and hence the insurer, is at risk under a
particular contract) will vary.
The cover provided by most insurers is aimed at contracts on credit terms
of up to 90 days (but you can cover up to 180 day terms). Pre-credit
risk (PCR) cover of six to twelve months can be covered. Traditionally
the length of the credit risk (invoice period) is expressed in days while
the pre-credit risk period (pre-shipment or manufacturing risk period)
is expressed in months from the date of contract until the forecast final
date of despatch.
Medium Term
Cover is offered by a number of insurers who will look to support
exporters whose contractual terms are longer than 12 months PCR or
180 days payment risk. They may have the capability to cover pre-credit
risk periods of up to five or sometimes seven years. Credit risk periods
of up to 360 or 720 days can be covered. Of course, just because an
insurer can provide long cover does not mean that he will do so. If you
are selling day-old chicks, for example, your insurer will expect you to
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The BExA Guide to Export Credit Insurance
trade on terms of no longer than 30 days.
Medium and long-term cover for capital good and project contracts
which have pre-credit periods or credit terms that exceed five years
will usually fall outside the capabilities of the private market and may
be insured by the appropriate national export credit agency, ECGD in
the UK.
If ECGD cover is not available, you may be able to establish cover
that will roll over after an initial period to give cover for a longer term
contract, without requiring cover to be in place at the outset for the
whole length of the contract. For example, cover might be put in place
for the first five years of a nine year contract. This would be extended
after year one so that the cover extended to take in year six, then at the
end of year two it would be rolled over again to cover year seven, and
so on. The exporter would thereby always have at least four years of
cover ahead of the current contract year.
The concern here is that if the insurer’s appetite for the risk reduces
during the contract period, the exporter may be left without cover
before the contract is completed. However, the four year lead time
would allow time for the insurer to change his mind and come back
on cover or for the exporter to address his contract exposures before
reaching the end of the current policy or to find another insurer. There
are two schools of thought on this subject. On the one hand, having
a cushion of four years ahead gives enough time to obtain alternative
cover if insurers do not renew their cover. On the other, the uncertainty
suggests that you should only use this cover if you are able to terminate
your contract in the event that the insurance is not extended. The
real risk is with on-demand contract bonds: you cannot just ask for
them back if they are valid for some years into the future. This type of
arrangement is best put in place via a specialist broker.
Policy structures
Policy structures are fairly flexible and can be shaped around the
business that is insured. The intention is to reflect the particular features
of the exporter’s business, along with the volume of business that is to
be insured. The exporter may simply choose to cover specific or single
customers, or just his top accounts or a selected risk category. However,
most insuring exporters have tended to cover a portfolio of risks (the
whole turnover approach). Insurers offer lower rates of premium to
exporters offering the whole of their export book (or at least a good
spread of business) than just higher risk customers or markets. After
all, insurers have shareholders too. If you don’t like the risks, they are
unlikely to find them too attractive either, at least without a balancing
spread of what is perceived to be the better risks.
An engineering exporter sold machinery to a Spanish biscuit manufacturer.
The insurer had no difficulty in agreeing a credit limit on this long-standing
and respected customer. Surprisingly, there was a bad debt – for which
the credit insurer paid a claim. One night, a disgruntled employee at the
biscuit factory took a JCB and drove it through the production line. The
biscuit company could not survive the disruption and loss of business and
was wound up
‘Whole turnover’ might literally be that, the portfolio covering every
one of the exporter’s customers, but more likely a definition of whole
turnover will be agreed that satisfies both the exporter’s and the
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The BExA Guide to Export Credit Insurance
insurer’s requirements. Broadly speaking, the insurer will not wish to
be ‘selected against’, but will be sufficiently flexible to ensure that the
cover is focused on the exporter’s main concerns or that parts of the
business perceived as low risk are excluded from the cover, such as low
value orders or off-the shelf spares.
Typical categories for selection of the agreed spread of risk to be insured
include:
• OECD markets only - where emerging markets are covered by bank
security
• emerging markets only
• product – eg capital goods, not spare parts
• size of customer exposure – credit losses of less than £x being
manageable
• credit risk period – longer credit risks being protected elsewhere
It is not uncommon for an exporter to select different types of cover for
various divisions within his company – for example the manufacturing
division might have both pre-credit and credit risks covered, but the
spares division would probably only need credit risk cover.
A manufacturer of sportswear & golf equipment was exporting to several
European countries. The Italian market was proving particularly competitive
with low margins. To compete more effectively, the company decided to
offer lengthened open account credit terms allowing retailers to stock more
of the product range. A credit insurance policy was used to mitigate the
extended risk of non-payment and allowed low-priced trade finance to be
put in place to improve cash-flow. It proved an effective strategy; Italian sales
improved and the exporter did not have to wait for its cash.
Variations on the whole turnover theme
‘Ground up’ cover is most readily associated with a whole turnover
policy. In the widest sense the exporter will insure all his business with
no excess, hence ‘ground up’. This is very unusual in its pure sense as
almost all insurers will require some form of risk-sharing, usually a 10%
uninsured retention, on the basis that they believe that it is important
for the exporter to maintain an interest in collecting overdues and
making recoveries in the event of loss.
An ‘excess’ can reduce the premium costs. Consult your broker as to
the excess type that is right for you. There are a number of options:
• Threshold (also called a non-qualifying loss)
A loss must exceed a certain level (referred to as the threshold) for
there to be any contribution from the insurer. However, once that
level is exceeded, the insurer will contribute to the total value of the
loss, subject to any uninsured percentage or credit limit restriction.
This structure is designed to save management time from being used
to negotiate small claims. It also avoids the requirement to declare
small underpayments as losses, which would potentially have an
impact on the insurer’s view of the risk at policy renewal.
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For example, if a policy has a threshold of £15,000 and pays an
indemnity of 90% (ie the policyholder bears 10% of each loss),
and a loss of £14,999 occurs then this loss is borne entirely by the
policyholder. However if that loss were £15,001 then the insurer
would make a payment of 90% of the total value, ie £13,500.90.
The BExA Guide to Export Credit Insurance
• Minimum Retention
The policyholder must retain a minimum amount or the uninsured
percentage which ever is greater. For example, if the policy indemnity
is 90% and the minimum retention is set at £15,000, the policyholder
must bear that £15,000, until the value of the loss results in an
uninsured percentage value of over £15,000. The breakeven figure
in this example would be a loss of £150,000 (£150,000 x 10% =
£15,000). For losses in excess of £150,000, then the policyholder
will only bear the 10% uninsured percentage. For losses of less than
£150,000 the exporter will bear a larger proportion (eg on a loss of
£100,000 the insurer would pay £85,000 with the exporter carrying
the minimum retention of £15,000, being more than the 10%).
• Each and Every
A level of excess is retained by the policyholder for each loss that
occurs. The insurer will then contribute at the agreed indemnity for
the sum in excess of that first loss. So the policyholder retains the
Each and Every first loss as well as the uninsured percentage.
For example, with a 90% indemnity and an Each and Every first loss
of £15,000, a £50,000 loss would result in a payment of £31,500
(£50,000 - £15,000 = £35,000 x 90%).
Policy excess
‘Excess of loss’ cover is the main alternative to ground up cover. The
exporter who chooses this structure of cover may still be looking to
cover his business on a whole turnover basis but will be able or willing
to accept a larger level of risk retention. Typically, the exporter will be
more interested in protection for the balance sheet than protection for
cash flow. Sometimes referred to as catastrophe cover, this cover is
designed to fit with a risk mitigation programme that lays off risk which
is at an unacceptable level to the company. There is a balance to be
struck between the level at which the excess is set and the cost of the
cover. As the excess gets higher, so the cost reduces.
An advantage of the excess of loss structure is that it puts some distance
between the insurer and the risk. This should enable the insurer to be
more supportive in terms of the level of cover that can be written on
customers in riskier sectors or territories. Whilst the initial cost of the
cover is reduced in terms of premium spend compared to ground up
cover, the increased level of risk retention and management will be a
cost that the exporter must bear.
Excess of loss policies are structured around the annual aggregate
deductible or policy first loss (often referred to as an aggregate first loss
or AFL). This is usually set at a level which is slightly in excess of the
average level of losses suffered annually over the previous three years to
account for the ‘normal’ pattern of losses, with the intention that the
insurance should pick up losses that are out of the ordinary. It should be
noted that the AFL is a function of value and also time. So, if you extend
the policy by 3 months, you should expect the insurer to increase the
AFL by one quarter. Further, you can see that the AFL is set for a discrete
year. If you have a loss where there were 2 deliveries spanning the
renewal date, the insurer is entitled to apply the AFL of both years.
One significant advantage of the excess of loss cover is that many
insurers will grant 100% indemnity, on the basis that the first loss has
already been taken by the exporter and this represents an inducement
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The BExA Guide to Export Credit Insurance
for the exporter to ensure that recoveries are pursued vigorously.
There is usually a non-qualifying loss whereby small losses are excluded
entirely from cover. Qualifying losses that fall within the deductible
are retained by the insured for his own account and are accumulated
until the level of losses matches or exceeds that of the deductible.
Subsequent losses are then indemnified. In the event of a claim, the
insurer will assess all qualifying losses, ie including those that fall below
the deductible. So you will need to assemble claims documentation for
all losses if the deductible is likely to be breached.
For example, if a policy has a deductible of £500,000, with the value
of losses that in aggregate exceed that level being paid at 90%
indemnity, and qualifying losses of £1,000,000 occur, the claim
payment will be £450,000 (£1,000,000 less £500,000 losses below
the deductible, leaving £500,000 at 90%).
Policy Limit
Every policy will carry a maximum liability which will cap the aggregate
value of claims that will be paid by the insurer during the policy period.
This maximum is sometimes called the insurer’s maximum liability or
IML. In some policies, the maximum liability will be a multiple of the
premium paid during the year. Along with the spread of risk and your
loss record, the maximum liability will be one of a number of influences
on the pricing of the policy. Exporters need to be certain that the
maximum liability is sufficient to cover a catastrophic loss resulting
from a political event that disrupts a whole region, rather than just one
country, but not unnecessarily high because that would have an impact
on the cost of cover.
If you have one exceptionally large contract, be sure that both the
policy limit and credit limit are sufficient. If the credit limit is greater
than the policy limit, then the policy limit is the maximum that the
insurer will pay.
Selected Accounts
‘Top account cover’ is, as the name suggests, cover which is used by the
exporter to insure only his largest customer exposures. It is often used
to mitigate the concentrated risk associated with having a few very large
customers, which in the event of failure would have a detrimental affect
on the balance-sheet of the exporter or even threaten the company’s
own solvency.
Selective forms of cover can be designed to focus the cover where the
exporter feels it is most needed. It might well be that it is not the
largest customers that are a concern but that exposure to the secondtier customer is of more concern. Perhaps the size of the exposures
combined with the lesser financial strength of these customers is the
issue.
‘Datum line’ is a form of top account cover whereby the exporter
chooses only to insure customers that, during the policy period, exceed
an agreed level of exposure.
‘Single situation risk’ can be insured with a number of credit insurers,
but by no means all. It will be expensive because, by definition, there
is no spread of risk. This cost can be alleviated to some extent if the
exporter is an habitual user of this form of cover, thus establishing a
reputation in the market as a regular user of the product, and thus
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The BExA Guide to Export Credit Insurance
giving a spread of risk of sorts to the market, over time.
Insurer Types
There are two main categories of insurer: the excess of loss insurers
that stand behind the exporter’s own credit management systems, and
the credit limit insurers that provide credit management services that
effectively replace some parts of the exporter’s risk mitigation or credit
control procedures.
Excess of loss insurers
The insured is given a high degree of autonomy in credit vetting and
limit setting, the management of overdue accounts and the collection
of delinquent debts. The intention is to recognise the sophistication
and capability of the exporter’s processes and his knowledge of his
customers and trade. The exporter is able to function with only marginal
involvement from the insurer – perhaps advising only the details of the
largest customer exposures. While a large amount of autonomy is given
in the credit limit process, any overdue debts must still be notified to
the insurer without delay.
Credit limit insurers
These credit insurers set credit limits on your customers. Early notification
of payment overdues is required, and very often the insurer is involved
in the collection of delinquent debt. The benefit of this approach is that
the expertise of the insurer is exploited in terms of information about
customers, shared information about poor performing customers and
access to professional collection facilities. Such insurers most commonly
offer ground up over.
A UK exporter was a supplier of scrap metals, mainly to customers in India
and China. Funded by family money, it had no bank borrowings. It bought
on FOB terms and was paid cash against documents on arrival through the
buyer’s bank. It had a history of no defaults or bad debts. Its only asset
on the balance sheet was the unencumbered trade debtors. Given the
markets it sold to, it was unlikely that a bank would provide an overdraft.
Therefore invoice discounting was the only practical option for financing,
but it was virtually certain that the bank would require credit insurance. It
was important that any policy obtained allowed trading on CAD terms as this
was the exporter’s unique selling point, its competitors all requiring letters of
credit or cash in advance.
A whole turnover credit insurance cover was put in place. The exporter
valued the credit limit reviews from the credit insurer. The cover enabled an
invoice discounting facility to be negotiated with a bank to cover the cash
flow while the goods were in transit.
This increased the exporter’s working capital three fold and increased their
turnover seven fold in two years.
Different exporters will generally find that some variation of these
different approaches will match their own risk mitigation and appetite
strategy, the sophistication of their credit management systems and the
size of their exposures and turnover. A broker will be able to advise you
as to what is best for your company.
Whatever the style of the insurer and the structure of the policy,
the cover can be established on either a Risks Attaching or a Losses
Occurring basis. These terms have long caused confusion amongst
innocent exporters; the difference is important.
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The BExA Guide to Export Credit Insurance
Risks Attaching – the business that is transacted during the policy
period is covered from the date that the risk commences. The cover
attaches to invoices raised or despatches made during the policy period.
It is quite possible, therefore, for the loss event to happen outside of the
policy period yet still be covered.
For example, a Risks Attaching policy period runs from 1 January 2007
to 31 December 2007. There could be a valid claim for an invoice
that is issued on 30 November 2007, with a due date of 31 January
2008, if the customer became insolvent on 10 January 2008. You
would claim on the prior year policy for this loss.
Losses Occurring – sometimes called claims arising, the event that
causes the loss must happen during the period of the policy, and
regardless of when the invoice was issued. In other words, it is the
date of the loss that is important, not the date that the invoice was
issued. This means that invoices issued prior to the commencement of
the policy can be insured, but it also means that once the policy expires,
outstanding invoices are no longer insured under that policy, unless you
renew the policy.
For example, a Losses Occurring policy period runs from 1 January
2007 to 31 December 2007 and an invoice is dated 30 November
2007 for payment on 31 January 2008. Insolvency occurs on 10
January 2008. This is not covered under the 2007 policy but would
be covered under a 2008 losses occurring policy.
It is common for a risks attaching policy to involve premium calculated
on turnover, and in relation to losses occurring, for premium to be
applied to outstanding invoices.
If you wish to transfer from a Losses Occurring to a Risks Attaching policy,
then it is important to watch for the gaps that this move will create;
invoices issued during the Losses Occurring policy period and falling
due during the Risks Attaching policy period will not automatically be
covered. You will need to discuss these with your broker and insurer.
Similarly, in a transfer from Risks Attaching to Losses Occurring policy,
you would be paying for double insurance (but of course would only be
able to claim once).
The key issue with Losses Occurring policies is that the exporter does
not know for certain that, at the time of taking the order, the debt will
be insured on shipment or invoicing. It is not unknown for an insurer
to decline to renew a policy if the losses or potential losses are rising
rapidly.
Export Credit Agencies
Export credit agencies (ECAs) differ in purpose, philosophy and
approach from the commercial market and as a result are able to
support contracts with long horizons of risk. In fact, it tends to be their
unique selling point that they can cover long-term contracts, often in
more difficult markets.
The Export Credits Guarantee Department (ECGD) is the UK
government’s ECA. ECGD’s remit does not allow it to compete with
the commercial insurance market and so traditional short-term whole
turnover cover is not offered. So, this route is only worth considering
for short (up to 180 day) payment terms if the contract that needs to
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The BExA Guide to Export Credit Insurance
be insured has a very long performance period (over 5 years) or is too
large for the commercial insurance market, or is with a customer in a
difficult market.
ECAs tend to specialise in supporting only the export of capital goods
and project contracts, although some do continue to insure some
short-term business as well. The ability to support the financing of such
contracts (eg if your customer wants to make payment to you over
a period of several years after you have delivered and you need cash
on despatch) means that ECAs continue to provide useful backing for
financed contracts.
Because ECAs are ultimately funded by taxpayers, they are,
understandably, required to support contracts that benefit the country
of the ECA. This is most notable in that they place limits on the goods
and services that are included in the contract which do not come from
the ECA’s country. In 2007, ECGD changed its rules on foreign content;
it can now, broadly, support UK exporters where up to 80 per cent of
the contract price relates to goods and/or services from outside the
UK.
ECGD’s credit insurance product is called the Export Insurance Policy
(EXIP). There normally needs to be a separate EXIP for every contract,
and the cover will be specifically tailored to the contract. The cover
provided under the EXIP is very similar to that available in the commercial
market, but it is worth noting that ECGD allows you to:
• cover losses resulting from the failure of any customer to comply
with the terms of the contract (whereas commercial market insurers
covering a single contract tend to restrict this cause of loss to
government or public buyers);
• choose whether or not to insure the pre-credit risks in addition to
credit risks;
• select any percentage of cover up to 95%;
• select a reduced level of exposure to insure if the contractual payment
profile is suitable.
ECGD’s premium rates are determined on a case-by-case basis, but
you can get some idea of the likely rate by accessing the premium
calculator at ECGD’s website (www.ecgd.gov.uk). ECGD’s premium
rates are often comparable with the rates available from the commercial
credit insurers, but they are unlikely to be lower because ECGD is not
supposed to compete with the private market. EXIP premium is usually
payable in full upon acceptance of ECGD’s offer of cover.
If you take EXIP cover for a contract, ECGD will also allow you to buy unfair
calling insurance for any on-demand contract bonds that are issued in
connection with the same contract. ECGD’s Bond Insurance Policy (BIP)
premium rates tend to be much cheaper than the commercial credit
insurance market. (Note however that this product is not available on
a stand-alone basis, and ECGD will not currently provide any insurance
for bid/tender bonds or for offset performance bonds).
Regrettably, there are some fundamental disincentives to using ECGD’s
EXIP, for example:
• You will have to satisfy ECGD that the contract will involve the export
of goods or services from the UK (although the new 80% non-UK
content rule helps).
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• The EXIP application form contains some very detailed questions
about the impact of your contract on the environment and your
customer’s country’s social conditions, and it is possible that ECGD
will request further information from you before processing your
application. This information is a matter of greater concern for
ECGD than it tends to be for commercial insurers.
• You will be required to provide various warranties about bribery
and corruption and to provide detailed information about your
arrangements with any agents that might have helped you to win
the contract. It is important to have a clear understanding of these
requirements at an early stage.
• The whole process of submitting an application, waiting for ECGD
to underwrite the cover, and receiving and accepting an offer means
that it can sometimes take several months before cover is put in place.
This contrasts starkly with practice in the commercial market.
• The dispute provision of the EXIP is very unusual in that it not only
allows ECGD to defer liability in the event that the customer disputes
his liability to pay (as we would expect) but also to do so if the
customer hasn’t so disputed but if in the opinion of ECGD he would
be entitled to dispute his liability to pay. This represents a significant
departure from the market norm and appears to give the insurer all
the cards when the exporter makes a claim.
One final thing: because ECGD does not pay brokerage, you may find
that brokers are reluctant to recommend the EXIP. If you need any
advice and/or assistance in completing ECGD’s application forms, a
broker will almost certainly want to charge you a fee.
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The BExA Guide to Export Credit Insurance
Chapter 4
Pre-credit risk
If you make goods to order, the cover provided under a standard credit
insurance policy will not give you adequate protection; if your customer
were to go bust when the goods are still in manufacture, you would
have a work-in-progress loss. There could also be a political problem
during the manufacturing period – such as a war –meaning that you
cannot deliver to the site, or sanctions are imposed, or a military coup
happens, or your export licence is cancelled. It is to cover these risks
that pre-credit risk (PCR) cover can be purchased. The cover will start
at the date of contract (more specifically, on the date that the contract
becomes effective) and will cease for each despatch of goods at the
time that you despatch them (or invoice for them, if earlier), when the
credit risk section of the policy will pick up the risk. Of course, for any
contract the two sections of cover can be in operation at the same time,
in respect of different goods, some being manufactured (protected by
the pre-credit risk cover) while some are on their way to the customer
(credit risk cover).
The cover varies between insurers, but it is generally designed to
reimburse you for the costs of the design, supply and manufacture of
the goods which you cannot deliver, less any payments you have already
received (in respect of which the customer has no right of recovery)
and less the proceeds of re-sale of those goods (eg for scrap). In most
cases, cover is limited to a percentage of the actual costs incurred by the
exporter (ie without fixed overheads or profits). However some insurers
allow you to claim for an element of lost profit, whilst others agree to
cover the proportion of overheads relevant to the insured contract.
One thing is constant, however. The cover is always limited to what you
would have received if the contract had been fully performed. In other
words, if you are going to make a loss on your contract (selling price
£100, costs £105) you should not expect a claim to make you good for
£105 (or the indemnified portion of £105); your claim will be limited to
a maximum of the selling price of the goods that are not delivered.
What is covered?
The risks that will frustrate a contract before delivery such as insolvency,
government intervention, war, licence cancellation are likely to be
covered as standard. Payment default and transfer delays are likely
to be excluded, since these relate to the credit risk section of the
insurance. After all, payment for an invoice relating to the delivery
of your equipment will by definition occur (or not occur, in the event
of default) after you have despatched the equipment, in other words,
outside the period of the pre-credit risk cover.
If it is a UK government requirement that an export licence should be
obtained before goods or technology can leave the UK, credit insurance
might not provide cover until the licence has been issued. Or it might
provide cover against, say, the customer’s insolvency but not against
the risk that the licence is not issued. The question is always ‘what was
the event that caused the loss?’ Typically export licence cover only
addresses the risk that the licence is cancelled or not renewed, or a
requirement for it is imposed when it was previously not required. If
an export licence is required but is late in being issued, yet you will
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The BExA Guide to Export Credit Insurance
have undertaken obligations under the contract, your position under
the contract is uncertain. This problem can be solved by including a
clause which delays the effectiveness of the contract until the export
licence has been issued. Very similar considerations apply to the import
licence which usually has to be obtained by the customer.
Horizon of cover
PCR cover commences on the effective date of contract, and extends,
in typical wordings, to the despatch of your goods which is presumed
to be when you invoice the customer. Of course, if you invoice stage
payments, you should ensure that they are be covered for credit risk as
they are invoiced.
If you typically deliver FOB UK port and payment becomes due x days
from that delivery, this will work fine. If you are obliged to deliver to
your customer’s site, you would do well to check the policy wording to
ensure that there will be no gap in cover, ie your pre-credit risk cover
should not end when you place your goods on the ship because you
cannot create a debt until you have delivered and installed at site. Now,
this need not be a problem; most insurers that are willing to insure the
pre-credit risk will be willing to extend this cover beyond the normal
point at which it would terminate in respect of any one shipment in
order to reflect the terms of your contract. However, you should bring
these circumstances to the attention of the insurer when seeking cover.
It is always wise to tell your insurer everything in advance of establishing
cover for your business; he will not then be able to claim that he was
not aware of something that would have affected his understanding of
the risk. Of course, if your insurer is not willing to match his cover to
your contract, then you might wish to look for an insurer that would be
more supportive.
Insurers generally stipulate a maximum period between date of contract
and despatch, and in any case, they would expect you to perform in
the timeframe set out in your contract. In the event that you expected
to complete your contract performance in, say, 12 months and this
is specified in the credit limit decision but delays cause this period to
extend to 15 months, then you should advise your insurer as soon as
you have reason to believe that the period will extend.
For what sort of business is pre-credit risk cover likely to be suitable?
• Goods you make to order
• High value items – such as a satellite or a turbine – that can be resold, but not in a realistic timeframe and/or not at their original
price
• Specially designed software, training programmes, manuals etc
For what sort of business is pre-credit risk cover not likely to be
suitable?
•
•
•
•
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Standard goods that are easily sold to another customer
Goods that can be easily re-worked at minimal cost for re-sale
Off the shelf spare parts
Services charged on a man-day basis, perhaps invoiced monthly
The BExA Guide to Export Credit Insurance
One exporter who had insured his exports for many years on the basis of
just insuring the credit risk received an usually large order from a company
in Germany. Because of the size of the order the exporter asked his insurer
to insure this contract for pre-credit risk exposure as well as credit risk. As
the German company had been in existence for 99 years, and in view of the
long relationship with the exporter, the insurer was content to do so. What
were the chances of this German company, which had survived two world
wars, going bankrupt during the two years it took to perform this particular
contract? Not great. However, it happened, and the exporter was able to
claim for the cost of his work in progress on the contract.
What pre-credit risk insurance does not cover?
• Imprudent Trading
Just because your insurer has agreed to insure your delivery period of,
say, 12 months, does not necessarily mean that the credit risk cover
will be there when the time comes for despatch. If you know that it
is not prudent to despatch (perhaps it is evident that the customer’s
finances or his country have deteriorated substantially since you won
the contract) then English insurance law allows the insurer to avoid
covering you if you decided, none-the-less, to carry on work or to go
ahead and despatch. This applies even if you have ‘permanent credit
limits’ (the insurer agrees to keep the limits in place for the policy
period) or if you have ‘binding contracts cover’ (the insurer agrees
you can despatch for say 3 months after the insurer withdraws your
credit limit). Both permanent credit limits and binding contracts
cover are commitments from an insurer that you can carry on with
work – but only if it is prudent to do so.
• Failure to open a letter of credit
Pre-credit cover does not cover you if your customer has agreed,
in the contract, to open a letter of credit and does not do so in the
timeframe set out. It is not an insured event and thus loss arising
from the customer’s failure to arrange for the letter of credit to be
established would not be covered by the policy unless, of course, he
had gone bust. If your customer is a public buyer (government or
quasi-government), some insurers will cover this risk (‘the failure or
refusal of the buyer to fulfil the terms of the contract’). A degree of
protection can be obtained by including an effectiveness clause in
the contract (see the BExA guide to letters of credit).
• Insolvency of suppliers or sub-contractors
If you cannot perform the contract because your supplier or subcontractor has let you down (even because of a political event), you
cannot claim for a resulting loss from your credit insurance.
• Liquidated damages
If the insurer establishes that your customer’s finances and/or the
country risk have deteriorated badly, and he is entitled to withdraw
the credit limit, the exporter is usually able to submit a pre-credit risk
claim (if he holds PCR cover – a good reason for having it). If the
customer survives and claims liquidated damages from you because
you did not perform the contract, you probably will not be able to
claim the liquidated damages from the insurer. The moral here is
to work with the insurer early on, to arrive at a decision with which
you are both happy, and ensure that you have an adequate ‘force
majeure’ clause in your contract.
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The BExA Guide to Export Credit Insurance
The cautionary tale of the Miller Gap
Many years ago, Mr Miller was running a trading business in the UK
and was insured for pre-credit and credit risk with ECGD (which at
that time insured short-term business). He had manufactured goods
almost to completion and read in the news that his customer was in a
great deal of financial trouble. He realised that his policy covered him
if his customer went bust before despatch, but it also required him to
be prudent and therefore he should not make the despatch if it was
likely that his customer would not pay. Since his customer was only in
financial difficulty and had not been declared insolvent, he could not
claim under his PCR cover, but he also would not be covered under his
credit risk cover if he despatched.
He was in a fix and had discovered a gap in the cover. The thought that
this gap would be named for him was probably of little comfort. The
publicity generated by this case led to the creation of cover by which
most whole turnover insurers will agree to withdraw the credit limit in
this situation, clarifying that despatch should not be made, and invite a
pre-credit risk claim as if the customer had gone bust.
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Chapter 5
When you apply for credit limits
As we have already seen, the credit insurance policy issued by most
whole turnover insurers operates largely by underwriting the credit limits
that you need for your customers. When applying for cover, whether
it is under a whole turnover policy or a single risk, the information you
give to the insurer has a direct bearing on the quality of cover you will
receive. Most insurers will have standard information that they require
but in general the greater the information provided, the more likely it
is that you will get the decision that you want when you want it. As in
life, so in credit insurance; if you are asking for something, it helps if you
make a good job of asking. Remember that it is in your interest to help
the insurer to help you.
The following is a checklist of points that you may wish to take into
consideration when applying for cover on a particular customer:
Customer
• Is your customer’s name correct? This does sound rather basic but
it is surprising how often businesses are known by their trading
styles or abbreviations. Always check that the customer’s name is
that of the legal entity that you are to contract with. A company
registration number is useful. When the credit limit (the cover note
which attaches the terms of your policy to this particular risk) is
issued, check the customer’s name – the insurer may have made a
mistake.
• Is your customer’s address correct? Have you supplied the site office
address instead of the registered office? The insurer will be interested
in the registered office. Again, check the order or the contract and
any letters or other documentation received from the customer – but
it is unwise to rely solely on information obtained from e-mails and
web-sites.
• Are there any other entities involved with the payment that may
have an influence on the cover? For example, end-users will need
to be noted and their relationship to you and the contract detailed.
If your customer is to pay you on ‘pay when paid’ or ‘as and when’
terms (ie he is only contractually obliged to pay you when he receives
payment from the end-user), you may be able to insure both these
payment risks. The terms of this cover will probably require you to
be able to direct your customer’s actions in pursuing the debt from
the end-user – this can be very hard to achieve unless you have a
strong contract or management control of the customer.
• Is your customer part of a larger group? This may influence its creditworthiness. Some companies on their own may not justify the cover
you are requesting but a strong parent may influence the insurer’s
decision.
• For regular customers, check with your insurer before applying for
cover that the details are the same? If not, then ask your customer for
registration details or run an independent check with a status agency
or check with the equivalent of Companies House, if available, in
your customer’s country.
• Tell your insurer about any previous trading with your customer. The
fact that your customer has paid you satisfactorily in the past may
not, on its own, justify a large credit limit but if you are having trouble
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getting the insurer to agree the figure that you need, it might help
your argument. Of course, the pattern of previous trading could
demonstrate a marked reluctance on the part of your customer to
pay, in which case you must not withhold this from the insurer. To
do so could lead to the insurer citing ‘non-disclosure’ as a reason for
not paying a claim.
Country
• Is your customer registered in a different country to its trading offices?
If so, you will need to be sure of which entity you are contracting
with and that both addresses are given to the insurer.
• Is the contract to be performed in a third country? Insurers will wish
to be informed if you need to cover any risks from that third country
or that, in order to be paid, you are obliged to perform work in the
third country. They will then take a view as to their willingness to
cover these additional risks.
• If your customer is part of a large group, you will need to be sure of
where the payment is coming from.
Payments
• Be clear about the credit period. This is calculated as the number of
days between the date of the invoice and the due date.
• Detail when the debt is created: on despatch, completion of services
etc? Any payment milestones should be explained, including any
certification arrangements.
• What is the expected method of payment? Is it by bank transfer or
by letter of credit?
Amounts
• Ensure the value on the application is sufficient to cover the aggregate
contract price of all invoices expected to be outstanding at one time.
Insurers will only pay claims up to the amount of the credit limit. For
example, if your payment terms are 30 days, ensure your credit limit
covers around three months worth of sales to allow for overlaps due
to the bunching of shipments or delays in payment.
• For large contracts you will need to work out your exposure rather
than the contract price or the invoice value – in which case you
will have to produce an exposure profile (not just a cash flow chart)
which shows, where you have PCR, cash to be received irrevocably,
cash out and commitments that will have to be honoured even if the
contract is terminated, as well as invoices outstanding. You should
always add a contingency for continuing to accumulate further
commitments before the decision is made to pull the plug. Adding
a three month delay to all shipment dates and then a further three
month delay to the payment might be prudent.
Period of Cover
• When do you wish the cover on this customer to start and to end?
Will this fall outside the terms of your policy either because of the
credit period or because the last due date is after the expiry of your
policy?
• If you hold PCR cover, it is best to establish it on a ‘risks attaching’
basis to ensure that the whole contract is included in cover even
if the final despatch or final payment falls after the expiry of the
policy.
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Goods / Project Description
• Insurers are sometimes wary of ‘lumpy’ risk portfolios where you have
concentrations of exposure on particular customers. In these cases,
you will need to provide more information than usual to encourage
the insurer that this is in fact a good risk, perhaps because of your
good relations with your customer. As always, you want the insurer
to cover your risk so it is in your interest to persuade the insurer.
•What is the purpose of the contract?
o Is the customer making a capital investment to increase or
improve his own manufacturing or selling activities?
o Is the customer a contractor who has a contract from an end
user to supply a large range of purchases?
Other Risks or Mitigating Factors
• Is there an underlying financing transaction for the contract? This
may often be the case with capital goods. The presence of funding
from a large end-user or other source can significantly enhance your
chances of being paid, especially if the funds can be paid directly to
you without passing through your customer’s hands.
• What payment security is available? Has your customer agreed to
provide a letter of credit or is the customer prepared to obtain a
parent company guarantee?
• Are you required to supply an advance payment guarantee
or performance bond? If so, this will add to the risk being
underwritten.
You might find it worthwhile setting up a few simple computer reports
to record your applications for cover. It has to be said that some basic
accounting packages may be ideal from an accounting point of view but
they do not lend themselves to credit control. The ideal computer system
will integrate a credit limit with the procedure for accepting orders and
issuing invoices to ensure that new business cannot take the exporter
over its insured limit without the approval of whoever is authorised to
accept uninsured risk. Due dates of payment, credit terms and dates of
receipt of payment should also be recorded, monitored and reviewed,
for example in the form of an aged debtors listing. If payments are not
received within a specified time, the system should also ‘stop’ further
transactions and flag the account for review. Sales teams, and others
in the business, need to be made aware of the responsibility to pass
on to the person running the policy any worrying information about a
customer, since if the information could be classified as adverse, it could
affect the cover and need to be passed on to the insurer.
This may sound involved but time spent on some fairly simple reporting
procedures at the outset will be repaid a thousand times.
One British exporter had a sales operation in Algeria and had identified a
significant opportunity to increase sales if it could offer easier payment terms
to its customers. It had identified the principal risk as delayed payment rather
than non-payment. They therefore had to manage the cost of funding a delay.
By arranging a credit insurance policy the exporter was able to offer a mix of
open account, bills of exchange and letter of credit terms, including up to
540 days for the letter of credit. The exporter increased its turnover to Algeria
threefold over three years and even improved the gross margin. Furthermore
as the debts were all fully insured, a significant profit was released from the bad
debt provision. The exporter also arranged an invoice discounting line with a
bank against the security of the insurance, which provided funding for the debt
and reduced its average days outstanding from around 270 days to 45.
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Chapter 6
Your customer is WHO?
How the insurer assesses risk
As we have seen, there are two constituents of insured risk: political
risk and commercial risk. There is a degree of overlap between the two
since it is difficult for a business to operate in a poor economy or where
there are political upheavals.
Political Risk
Political risk is the country risk of your customer (and, effectively, of any
country which might affect the performance of your contract, usually
excluding your own country). A simple definition of country risk is:
systemic conditions and events that are beyond the control of individual
customers (private companies) and can cause payment interruptions.
Country risk has a broader dimension than political risk, as it includes the
risk of events that could affect individual buyers but do not necessarily
give rise to a political risk claim. These risks include, for example, a
major devaluation or a recession driven by major economic imbalances
(as opposed to normal fluctuations of the economic cycle).
Each credit insurer will have its own methodology for assessing country
risk. This should not be confused with other ratings, for example,
sovereign ratings of the major agencies, as they look at somewhat
different aspects of risk. Precise methodologies will vary, as different
types of cover require greater weight to be given to some aspects of
country risk than others, and perceptions of risk among insurers will
vary. Nonetheless there are some general features common to country
risk assessment; these can be represented as follows:
• Systemic political risk. There are two aspects to this. The first can be
defined broadly as socio-political fault lines, eg factors such as ethnic
or racial divisions, ineffective government succession procedures,
international relations, impact of external influences. The second is
government effectiveness, such factors as the competence of officials
and politicians, ability to command a majority in parliament (or
equivalent).
• Systemic economic risk. This also has two components. The
first is what might be termed macro-economic imbalances. This
includes factors such as fiscal and monetary policy, public debt
and the external balance. The second comes under the heading
of institutional/structural factors and includes elements such as the
effectiveness of bankruptcy laws, property rights and red tape and
administration.
Having assessed the likelihood of a payment disruption occurring, based
on analysis of the above risks, the insurer will usually assign a country
to a risk category or grade that will contribute to the determination of
limits for buyers. Insurers will also maintain a database of aggregate
claims payments experience in a particular country and that will be
used to supplement this analysis.
The following table gives some examples of key trigger events that
would give rise to a payment disruption. It also shows what kind of
claim could occur as a result:
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Trigger Event
Potential
Claim
Examples
devaluation of local currency
commercial
Asian Crisis 1997; Russia
1998; Brazil 1999;
Turkey and Argentina 2001
restricted access to foreign
exchange
political
Russia 1998; Venezuela 2002
ongoing;
Ukraine 2004
crisis-driven recession (noncyclical)
commercial
Asian Crisis 1997; Russia
1998;
Turkey and Argentina 2001;
Brazil 2003, Zimbabwe
(ongoing)
debt default
commercial
or political
Russia 1998; Argentina 2001
banking crisis
commercial
or political
Russia 1998; Turkey and
Argentina 2001
war/civil war
commercial
or political
Cote D’Ivoire and Iraq (both
ongoing);
Kuwait and Iraq (1991)
sanctions
political
Libya (US) until 2004; Iran
(US) ongoing
weak property rights
commercial
Russia (Yukos) 2003-05
nationalisation
political
Bolivia 2007, Venezuela 2007,
Zimbabwe ongoing
Commercial Risk
Before agreeing a credit limit, the insurer will vet the customer and
consider each of the following:
Your customer’s payment record
The insurer has a database of payment profiles and may refuse cover
if there is a poor profile as a result of other policyholders reporting
the customer as a slow payer to the point where it may give cause
for concern. Insurers use status agencies to check the customer for
debt collection experience, for the overseas equivalent of county
court judgments, or for references that show delayed payment to
suppliers in the past. An insurer’s view is derived from considering
various sources and so this view provides a robust basis for a cover
decision.
Your customer’s established strength
There are common denominators in the profiles of businesses:
sales volumes, employee numbers, number of years of successful
trading under the current management. The insurer uses that
information to build trade sector knowledge including the supplier
base and competitor positions. Where these indicators suggest a
stable position, the insurer will provide cover. If there is a change
in the ownership of your customer, insurers devote resource to
understanding the impact of new management in a merger,
acquisition or buyout situation.
Getting financial information about your customer
An insurer may approve your customer without requesting from you
any detailed statements of assets and liabilities. An insurer with a
global presence will check your customer in his country of operation
where the insurer’s local contacts can be active in liaising with local
businesses through telephone interviews, visits and press comment
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The BExA Guide to Export Credit Insurance
about the customer or the competition in the trade sector. The
insurer can often use the leverage of several policyholders to obtain
financial information direct.
Proving a satisfactory financial position
Where available to the insurer from agencies or registers, an annual
report ideally shows that your customer has sound cash flow, a
satisfactory balance sheet and a reasonable profit & loss position.
The insurer will have a database holding the customer’s figures
over a number of years, and the trend in these can indicate stability
or instability. The insurer makes these assessments on both your
customer and its group of companies. The assessment focuses on
cash from operations, either positive or negative, from which an
insurer forms a view of likely utilization of bank or similar funding.
If a buyout has taken place in the last three years, the insurer will
compare the earnings in the profit & loss account to the interestbearing debt in the new holding company. An insurer will have
concerns if cash is earmarked for servicing existing debt, particularly
where a bank or former holding company has a charge over assets.
The insurer aims to answer the question “does the company make
enough money to pay its bank interest?” If it does not, then you
would be well advised to find an alternative customer.
Monitoring after cover is approved
Underwriting systems pick up warning signs of slow payment reports
or a weakening of the balance sheet. The database highlights where
there is cause for concern, for example where the current directors
or owners have a history of involvement in failed enterprises.
Insurers check registers in countries where filing an annual report
is compulsory because, when a company or group does not file its
reports promptly, this may signify a problem such as the inability to
obtain an audit certificate. Where insurers recognize characteristics
that are reminiscent of other cases, action is taken to prevent a
bad debt. Some companies pay their domestic suppliers first and
overseas suppliers second and so steps need to be taken at an early
stage to guide exporters away from problems. If a policyholder is
facing a payment problem with his customer, the insurer can assist
with the choice of a debt collector or with advice about local redress
for unpaid items.
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The BExA Guide to Export Credit Insurance
Chapter 7
The banker’s view
Credit insurance developed a role in supporting the finance of the insured
exporter very early in its history. The original function of the Export
Credits Guarantee Department, in 1919, was to guarantee export bills
of exchange so that British exporters could have them discounted by a
bank. Banks soon concluded that a credit insurance policy represented
valuable security for lending whether against individual sales or as
support for an overdraft. The means of noting and securing the bank’s
interest in the event of a default by a customer has developed over time
to the point where the bank has become more closely involved in the
policy.
The bank as loss payee
This is the simplest form of notification of a bank’s interest in a policy.
When the insurer accepts liability for a loss, the claim will be agreed
with the exporter, but the claim will be paid to the bank. The bank’s
receipt is good discharge for the insurer, but the bank has no right to
interfere in the claim process or to be advised during the policy period
if the insured exporter breaches policy conditions or gives the insurer
grounds to terminate the policy. It is possible to give the bank a greater
degree of security than as a loss payee but this is the most basic form.
Banks have had mixed experience as loss payees. There are many
examples where it has worked well. The existence of the insurance, and
the extra assurance that claims will be paid to the bank, has enabled the
finance provider to commit to higher levels of support, sometimes at
finer margins, than would otherwise have been available.
However, there has also been experience of losses where claims have
not been paid. When this happens, it can lead to some lively debates
between bankers and insurers. Another problem arises where the
insured exporter becomes insolvent and a dividend is paid as a recovery
on an old claim. The dividend is paid by the insolvency practitioner
to the exporter but the insurer will have paid the bank, and therefore
demands its share of the dividend from the bank. The lessons learned
have been reflected in the approach that banks now take when relying
on credit insurance in support of finance.
Invoice Finance
This is a development of the loss payee approach, where the bank
secures a charge on the basis of the invoices issued by the exporter,
subject to the invoices being insured under the credit insurance policy.
The bank normally obtains the right to have notices from the insurer
in relation to the credit limit and premium paid copied to them and
may also have the right to have their interest protected in respect of
invoices against which they have advanced. The bank does not accept
any liability towards the insured exporter, nor does it take collection
action.
From the exporter’s point of view this arrangement can look and
feel like an overdraft, but with additional burdens of administration,
designed to provide evidence of the value and term of the invoices
being financed. Indeed some of the schemes historically used in this
area have been branded as ‘Export Overdrafts’. As with an overdraft,
the bank will retain the right of recourse (to be repaid by the exporter)
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The BExA Guide to Export Credit Insurance
if the customer defaults on the invoice that has been financed. There is
also likely to be a maximum term that will be financed, should the debt
become overdue, before the bank’s right of recourse is exercised. The
bank will also, typically, restrict the amount borrowed to a percentage
of each individual invoice.
This form of lending has the virtue of linking the supply of finance to
the exporter’s success in achieving sales. It is therefore very attractive
to companies with rising turnover who might have levels of support
restricted if they were assessed only on conservative, ‘balance sheet’
formulae. From the exporter’s perspective it also offers a good degree
of flexibility.
From a bank’s perspective this form of lending can be regarded as
relatively high risk:
• It requires a high degree of reliance on the exporter to fulfil a wide
spectrum of performance obligations. These range from delivering
under the trading contract, to managing the insurance policy and
the debt in a way that minimises the risk of any loss (to insurer,
banker and exporter alike).
• Trade finance typically relies heavily on control of a transaction or, in
its absence, robust monitoring. Such monitoring ensures that any
early sign of things going wrong can be picked up and responded
to.
• It can be difficult for the bank to monitor the exporter, and in any
case, the bank has no right in the policy to either pay overdue
premium or submit claims, so if the exporter becomes insolvent, the
protection of the policy falls away.
Invoice Discounting
This is a further development, where individual invoices are large enough
for a bank to consider them individually and are raised on customers on
which they are likely to accept a risk and to advance a proportion of
the invoice value. Perhaps there are a number of export customers
which individually may represent less attractive risks but collectively
they provide an acceptable spread of risk; typically an advance of 80%
of all export invoice values would be acceptable so long as no single
customer exceeded 20%. Usually, the proportion to be advanced will
be greater if the invoice is covered by credit insurance. The bank will
require that the invoice should specify that the customer’s payment is
made to them (or a nominee company) rather than to the exporter.
When the bank receives payment, it will retain the amount financed,
plus costs and charges, and remit the balance to the exporter.
This form of finance requires a higher level of structure and monitoring
than simple invoice financing. From both the exporter’s and the
lender’s perspective, fewer, larger, transactions result in a lower
administrative burden and help ensure that there is a better, shared
understanding of what is happening with the debts that are being
financed. These structures can be used for short-term working capital
(up to 180 days) and for financing required by capital and semi-capital
goods providers who may be selling on more extended terms. Some
of these arrangements can be highly customised (particularly so for
larger companies) and the percentage of the debt financed, and rights
of recourse, will vary.
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Factoring
Factoring is carried out by specialist factoring companies, many of which
have been established by a bank. The factor can accept invoices from
many countries, and the intention is that the process will be continuous
and as routine as possible. The exporter establishes an agreement with
the factor which commits him to offer the factor all export invoices
for discount. The factor often retains the right to reject invoices, but
the time for them to do so after receipt will be very short. Factors
advance a proportion of the invoice value to the exporter on receipt of
the invoice. This can be with recourse (so the exporter retains the risk
of non-payment) or without recourse (when it is the bank that bears the
risk of non-payment).
A further service that factors can provide is to maintain the sales ledger
for the exporter, generating and maintaining a detailed profile of the
client’s accounts receivable and pursuing debtors for non-payment.
The factor’s client is able to outsource the ledger management activity
in this way and also maintain a continuous flow of cash.
If the factor can offer non-recourse finance, this is sometimes seen as an
alternative to credit insurance. However, the factoring contract is often
less flexible than credit insurance and also has the disadvantage that the
exporter loses an element of relationship and control of the treatment
of the customer. The more difficult countries or customers might be
unsuitable for factoring (the factor would not accept the risk) and it
could be difficult or very expensive to find an insurer willing to insure
only the countries that were unattractive to the factor – by definition
representing adverse selection against the insurer.
There has been a distinct shift over the last ten years or so from finance
of exporters’ working capital needs via overdraft, or tailored export
schemes, to schemes offered by banks’ factoring arms. The term
‘factoring’ has changed somewhat and providers, indeed services, have
increasingly been branded ‘Invoice Finance’ or ‘Invoice Discounting’.
This development stems from the banks’ factoring arms becoming
increasingly incorporated within the mainstream of banks’ working
capital support. The underpinning disciplines, systems, improved
monitoring and even control, are perceived by banks as involving less
risk than the lending vehicles they have displaced. Although they have
been rooted in domestic trade, banks’ factoring arms have increasingly
internationalised. In part they are following the wider shift in trading
patterns from secured trade (such as letters of credit and bills of
exchange) to open account (eg payment 30 days net) in the expanding
range of developed markets.
Factoring, particularly where it is without recourse to the exporter
or where recourse is limited, provides a high level of assurance to
an exporter that he will be paid, without the perceived difficulty of
making a claim (with scope for delay) associated with insurance. Of
course, this can come at a price. The exporter can lose an element of
control over the relationship with his customer. On the other hand, an
inexperienced, or smaller, exporter may welcome the extra muscle that
the banking support represents.
The without recourse solution is more likely to be available, and robust,
in markets where there is an established, sympathetic commercial
and legal infrastructure (eg think of Hong Kong compared to Peoples
Republic of China).
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For these reasons lenders are more likely to retain rights of recourse as
the exporter widens the range of financing and markets. These schemes
may be linked to the borrower’s own credit insurance (as described
under invoice discounting) or may be based upon separate insurance
cover which the financier has taken out to mitigate the risks.
These facilities all refer to invoices and their use, when insured, to
support bank borrowings and overdraft facilities. However, payment
instruments can also be used to give the exporter access to cash whilst
giving the buyer a period of credit after the goods are delivered. This is
most common in the capital and semi-capital goods sector.
Classically, an accepted bill of exchange would be bought at a sum
below its face value (“at a discount”) which would vary according to the
quality of the acceptor (customer). The value of credit insurance here
is that it can enhance the security represented by the bill and so make
it possible for exporters to obtain payment at a lower discount rate (ie
the bank will deduct less) than would otherwise be the case. The bank
advancing funds against an insured bill will usually expect to have their
interest noted on the policy and will often need to be the loss payee so
that any claim for non-payment is settled with the exporter under the
terms of the credit insurance, but the claim payment is made directly
to the bank. The credit insurance can give the bank the confidence
to advance against a bill or note where the customer is in a country
which would not otherwise be acceptable under the bank’s prudential
rules. Again, this is a well-recognised structure. The use of insurance in
this way is not restricted to discounting bills of exchange or promissory
notes. It can also, for example, support letter of credit business.
Forfaiting
This is often seen as an alternative to credit insurance. The forfaiter (bank
or other financial institution) accepts the total risk of non-payment.
This facility is usually associated with large value contracts on deferred
terms of payment, where the bill of exchange is avalised (endorsed
or guaranteed) by an acceptable bank, good quality corporate or the
Ministry of Finance of the customer’s country. The forfait market can
arrange financing lines to support contracts in many countries that are
usually regarded as medium to high risk, although there are likely to
be restrictions as to the maximum advance and maximum term. It is
possible that support which has been known to be available may be
withdrawn at short notice if market conditions change. For this reason,
it is wise to pay a commitment fee to the forfaiter – however such fees
can mount up if the manufacturing period is long.
Bancassurance
This term refers to insurance policies provided by a bank to its customer.
These insurances are not normally issued by the bank, which is, after all,
not an insurer, but are either issued in a fashion similar to an insurance
broker or are insurances provided by an insurance company to the
bank for them to sell to their customers. This facility usually involves
on-line credit limits and a high commitment to speed of response.
There are advantages both for the bank and for the exporter in these
arrangements. The exporter gains access to credit insurance, even if
his insurable turnover is below the normal minimum level, and the
existence of the insurance will give the bank greater confidence to offer
facilities such as overdrafts against trading with insured customers. The
bank has access to the pattern of business being done by their insured
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The BExA Guide to Export Credit Insurance
customer and also will know if, for example, the policy is at risk because
premium has not been paid.
Securitisation
Trade receivables are to bankers an “asset class” like any other, in that
they can be considered as providing a stream of income which can
be sold to investors who are not concerned about the underlying
transaction, but are interested in the security of the income, which
is normally defined by the rating applied by a rating agency. The
receivables are “parcelled” and bonds are created based on the value
represented and sold in the commercial paper market. The expectation
is that there will be a consistent stream of short term receivables to
purchase and that a consistent proportion of them will be settled on
due date.
In this kind of structure, the underlying payment conditions on each
invoice are not directly material (so long as they accord with the credit
terms expected), in the sense that invoices on open account terms of
payment are treated in the same way as invoices secured by bills of
exchange. Of course, the rating will be affected by the mitigation of
risk that eg an accepted bill of exchange can represent
There are features which make this a distinctive form of financing:
• First, it is intended that the exporter will benefit from a stream of
income which will replace other borrowing facilities and which can
be expected to be at consistently fine rates;
• Second, if the sale takes the receivables off the exporter’s balance
sheet the capital requirement will be reduced, making the exporter
more financially efficient;
• Third, the agreement can be established for a three or five year term,
giving stability to both the exporter and the arranging bank.
The major drawback to securitisation is the minimum size of eligible
receivables that is needed to make it worth establishing the rating
agency’s rating and the complex computer linkage by which the daily
issue of invoices is advised to the special funding vehicle. There is also
the question of those invoices not accepted into the financing, for
example, because the customer’s country is too low rated or where the
rating agency has set a limit on the total value of a particular debt rating
that can be financed. It is usually advisable for the exporter to have a
credit insurance policy so that the risk arising from debts which have
not been financed in this way can be protected.
Notwithstanding the drawbacks this structure can work well. It does
tend to reflect, at least in part, a concern for balance sheet management.
For example, a fast growing company with a well spread portfolio of
short-term, predictable receivables in strong markets, with a sound
track record of settlement, might find this attractive.
Benefits of insurance backed trade finance
The insured exporter is likely to enjoy two principal advantages. First,
there will be greater flexibility in terms of the customers that he can
trade with and the terms and credit that he can offer. It is not necessary
that there should be a payment instrument, such as a bill of exchange,
for there to be value for the lender to buy. Second, there will be
benefits in negotiation with the discounter, factor or financing bank.
As always, insurance will not make a bad contract good and will always
rely on good performance from the insured exporter. Even with the
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The BExA Guide to Export Credit Insurance
widest form of credit insurance cover, the bank will take account of the
competence and performance history of the exporter when deciding
whether to offer finance.
Whilst these points will be well recognised, bankers are more likely
to refer to ‘comfort’, rather than ‘security’ when referring to credit
insurance. When looking at transactions they are keen to identify and
reduce the risks involved, to make the deal acceptable. Credit insurance
has a role, but bankers look at much else besides. For example, a major
focus is the ability, and motivation, of key parties to meet performance
obligations critical to a successful outcome of the underlying contract.
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Chapter 8
To insure or to confirm, that is the question
Letters of credit and credit insurance are two very well established
methods of securing export receivables. Both have their advantages
and disadvantages and neither is always the better option. The prudent
exporter will examine each on its merits and decide which is the more
appropriate solution for a particular contract.
Letters of credit
A letter of credit is a written undertaking given by a bank to the exporter
on the instruction of the customer to pay at sight or at a determinable
future date up to a stated amount of money. This undertaking is
conditional upon the exporter’s production of documentary evidence
of contract performance as required by the terms stated in the letter of
credit. This is very much a short definition and you may care to refer to
BExA’s 2007 guide to letters of credit (updated for UCP600) for a more
detailed examination of this very important payment mechanism.
Letters of credit are defined by the International Chamber of Commerce
(ICC) whose guidelines (Uniform Customs & Practice) are internationally
recognised and may be used in arbitration. It is, therefore, important to
ensure that any letter of credit which you are asked to accept is issued
subject to the current edition of UCP. The current version at the date of
this guide is UCP 600, which came into force on 1 July 2007.
The major benefit of a letter of credit to the exporter is that he has
a payment obligation issued by a bank with which the exporter is,
we must assume, content. This payment obligation depends upon
the exporter’s satisfactory performance of his contract obligations as
demonstrated by the exporter presenting specified documents to the
bank within the time agreed. This generally removes any possibility
of payments being delayed as a result of disputes (unless a required
document needs to be signed by the customer). It also reduces the risk
of the customer failing to pay (if the bank fails to pay, then the customer
should still be under his contractual obligation to make payment to
the exporter). The customer is also protected because the bank will
not make payment unless the supplier demonstrates, by supplying the
correct documents, that the contract has been executed in accordance
with the conditions of the letter of credit. Thus neither party needs to
take anything on trust.
If there is any reason to believe that payment from the customer’s
bank may be prevented by political events, confirmation of the letter
of credit should be considered. In the UK this means that the letter
of credit would be confirmed by a UK (or perhaps west European)
bank, adding a payment undertaking that removes both the customer
insolvency risk and the country risk. Of course this is always subject to
the exporter providing the bank with the correct documentation. Of
course, the confirmation only secures the payment. The UK bank will
only pay if the exporter is able to present documents that comply with
the terms of the letter of credit. So, if you are not able to present the
correct documents (perhaps your export licence has been withdrawn,
or perhaps there is no ship going to the customer’s country because
of a war or a deteriorating political situation) then however good your
confirming bank’s credit you will not be paid. With a letter of credit
everything depends on presenting the right documents at the right
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time. This seemingly mundane part of the deal is critical because you
have to rely on so many external organisations to produce documents:
the shipping line, the consulate for your customer’s country, your cargo
insurance company, the export licence office if you need an export
licence and so on. So, even if you do choose to have a letter of credit
confirmed, you should still consider insuring the pre-credit risk if the
goods cannot easily be re-sold.
As well as this conditionality, letters of credit do come with some other
disadvantages. First, by requesting a letter of credit you are effectively
demonstrating a lack of trust in your customer. Your customer might
well be a household name in its domestic market and the request may
cause offence and damage your potential relationship before it begins.
Competitors may offer more liberal terms and thus be better placed to
win the contract.
Second, there are costs for both parties for using a letter of credit.
Often the bank opening the letter of credit will insist that the customer
already has sufficient funds lodged with the bank to cover its value.
This may mean that the customer’s working capital is tied up while
you manufacture and ship; this could be for months or even years
depending on the contract. This may affect the customer’s ability to
trade or his other banking facilities.
If you have the letter of credit confirmed, you will pay a fee to the
confirming bank. While there is no strict rule as to who pays this fee, it is
usual for bank charges in the customer’s country to be the responsibility
of the customer and those arising outside the customer’s country to be
picked up by the exporter. These costs may be considerable and will be
charged for each calendar quarter that the confirmation continues. If
your contract has a long lead-time, you have a choice between having
the letter of credit confirmed at the outset or waiting until you are
nearly ready to ship before seeking the confirmation. Early confirmation
means that you are fairly sure that the cash will be there when you need
it, but you will pay for the privilege. If you save money by waiting
until later, you run the risk that the confirmation might not be available
when you need it.
You can also expect the banks to charge a fee for advising you that the
letter of credit has been issued and each time it is amended and each
time a payment is made.
You must also consider other, hidden, costs. First, there is the wait
for the promised letter of credit to be opened. Complying with the
documentary requirements of a letter of credit (or waiting for a letter of
credit to be opened) may mean delay in supplying goods that are ready
and available for delivery, resulting in increased storage charges and
damaging your cash flow. There is the cost of checking documentation
and monitoring compliance, prior to submitting documentation
to the bank. The exporter must consider potential problems with
documentation (it is estimated that over 70% of first presentations of
documents are rejected, requiring the exporter to revise documents and
re-present them). It should also be borne in mind that compliance with
the contract is not the same as compliance with the letter of credit and
vice versa. The contract will stipulate the existence of the letter of credit
and it should say what terms, certificates or documents will be required
in order to trigger payment from the letter of credit. However, it is to the
actual letter of credit and not the contract that the bank will refer when
checking compliance and if the documents do not comply with the
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letter of credit, irrespective of compliance with the contract, payment
will be refused. If any of the documentation is missing or if there is
any conflicting or contradictory information within the documents, the
bank can (and will) reject the documentation and the exporter will not
be paid. In certain circumstances you may be able to negotiate with
your customer to change the documentary requirements of the letter
of credit but in many cases, because shipping documents are part of
the required documentation, the goods will already be en route to the
customer and so you will have thrown yourself on the mercy of your
customer’s goodwill, having despatched the goods with no definite
claim to payment.
The letter of credit is opened by the customer’s bank. It is subject to the
economic and political risks and conditions prevailing in the customer’s
country. If the country suffers a major financial problem, such as the
devaluation suffered by some of the “tiger” economies of SE Asia in the
1990s, the bank may not be able to meet its obligations. Indeed it may
be ordered by the central bank not to pay. Thus, whilst an unconfirmed
letter of credit may remove the buyer-related payment risk it is not a
guarantee of receipt of funds.
Credit insurance
Credit insurance is a flexible method of payment protection, which
should be seen as a potential substitute for, and also a potential
complement to, letters of credit.
Credit insurance enjoys several advantages over a confirmation (and
over letters of credit in general). Once the credit insurer has laid down
the conditions of cover, which will typically be few, you will have a
good idea of the total cost (insurance premium) which you can build
into your tender or contract price and thus the cost is borne by your
customer. The customer is not aware of the small additional charge for
the insurance (or even of the existence of the insurance) and so to both
parties the perceived cost may be nil.
A large engineering company employing over 5,000 people and trading
all over the world including Russia, China and South America was trading
on CILC terms. The exports were protected – there were no losses – but
the arrangement did not allow flexibility for last-minute orders of spares. It
was decided to move to trading on open account terms. The exporter took
out a credit insurance policy to cover the risk of non-payment and also to
support bank funding of the export receivables. Customers found the new
arrangement fitted into their business plan better than having to procure
the issue of letters of credit. This enabled the exporter to gain competitive
advantage and win more business. The cost of the insurance was considerably
less than that of the confirmations, yet the exporter was still protected and
received cash on export.
Because insurers are often prepared to offer cover on customers on an
unsecured basis, it is possible to offer the customer “trusted” status very
early on in a relationship which may facilitate faster growth because the
customer has not tied up capital, in providing a letter of credit, which
could be used to buy more goods. After all, it never hurts to tell your
customer that you trust him. An important additional advantage of the
insurance is the intelligence network that comes with the cover. An
exporter gains the benefit of access to a professional risk assessment
resource for monitoring payment risk that would be beyond the reach
of all but the largest of companies.
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As the terms of the credit insurance are generally widely drawn, it
is possible to use more flexible conditions in the supply contract, for
example, allowing shipment of the goods when ready. Any changes to
documentation may be agreed simply between customer and exporter
without involving a bank or paying their charges. Credit insurance
can be tailored to suit the nature of the goods being exported and
cover can be extended to give protection during the pre-credit risk
period. Further, because of its flexibility credit insurance is the better
option where contracts involving services are concerned (and invoiced
according to work done).
Many years after delivering a piece of capital equipment to Pakistan, a UK
exporter received an order, backed by a letter of credit, for spares. While
the order was welcome, the letter of credit was initially unusable because it
specified mark 1 spares while the exporter had now made modifications and
the new part was actually mark 5. The exporter had to ask the customer to
make changes to the letter of credit before it could be used.
In comparing credit insurance with confirmation, there are disadvantages
to the insurance. For the majority of companies, whole turnover credit
insurance will be the main option. This means that you present to the
insurer both the good risks and the bad risks. However, the insurer is
not obliged to insure the worst risks. By comparison letters of credit and
confirmations are priced individually, and the availability of the letter of
credit is only restricted by the customer’s own banking arrangements.
To some extent the desire of insurers to avoid the worst risk can be
offset by having the problem risks identified up front. The exporter
will then know which customers need extra care and seek security as
appropriate.
A credit insurance policy is also subject to conditions that must be
complied with. Claims will be rejected if the loss is due to the action (or
inaction) of the exporter in complying with these conditions.
Claims under the insurance policy are not generally settled immediately
so an insured may wait some time, perhaps up to 6 months (sometimes
longer), before a claim is paid. This obviously has a negative effect on
cash-flow. It is, however, usually possible to know if the claim will be
agreed before this time, in which case the payment can be recorded as
a trade receivable in your accounts.
In the event of a loss the insurer, generally, does not pay 100% of the
amount lost but typically pays 90% - 95% in order that the insured
should maintain an interest in pursuing the customer. Under letters of
credit, on the other hand, payment is immediate and for 100% - less
bank charges of course.
Credit insurance transactions are not necessarily attractive to banks for
one-off financing due to the risk of disputed debts and the risk of failure
by the insured to comply with the terms of the policy. On the other
hand, the discounting (early payment) of deferred payments under
letters of credit is common.
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A major UK food exporter set up a joint venture operation in South Africa to
organise deliveries and collect payment. The joint venture was successful and
grew the South African sales rapidly. It was realised that the receivables were
becoming sizeable. The company looked again at the invoicing arrangement
and was particularly concerned about repatriation of funds, even if the
transaction was supported by a letter of credit issued by a bank in South
Africa. One option was to obtain confirmation of the letter of credit by a UK
bank. This would have removed any South African payment risk but would
have been costly and tied up the joint venture’s bank lines.
The chosen option was to insure and operate on an open account basis with
short credit terms. The insurer was able to agree an open account credit limit
on the joint venture at a premium cost which was significantly cheaper that
the cost of confirming a letter of credit and it also freed up the joint venture’s
bank lines. The major concern regarding repatriation of funds was insured as
a cause of loss under the policy.
So, letters of credit and credit insurance both have their strengths and
weaknesses and in some cases the exporter may have little choice about
which technique to use. There may be instances where a credit insurer
will insist on the protection of a letter of credit or even a confirmed letter
of credit before accepting any risk in respect of a particular contract or
customer or market and in such circumstances an exporter would be
well advised to heed this warning. Similarly some countries insist that
importers trade on letters of credit in order to restrict access to scarce
foreign exchange. Where an unconfirmed letter of credit is involved,
it is advisable to check the price of confirmation from a UK bank and
compare this cost with that of credit risk insurance.
If you normally insure the pre-credit risk, you will still need to do so
in conjunction with confirmation of a letter of credit. After all, the
confirmation will give you no protection against loss arising from an
event occurring during the manufacturing period which prevents you
from providing the documents required by the letter of credit.
Letter of credit confirmation Credit insurance
Advantages
Advantages
• Payment of 100%
• Low cost
• Payment at due date
• Does not tie up customer’s bank lines
• Readily financed
• Flexibility – allows late changes to order
• Available case-by-case
• Internationally recognised
bank risk
• Cover can start at date of contract
thus protecting you in the event that
you are prevented from producing
payment documents
Disadvantages
• Simple invoice
• Cost – bank charges and
customer funding
• Inflexibility
• Strict adherence to
conditions of letter of credit
• Documentary requirements
can be unworkable
• Of no value if you cannot
present the necessary
documents on time
• Easy solution for services and spares
Disadvantages
• Conditions to be complied with
• Normally 90/95% indemnity
• Claims waiting period typically 4 or 6
months
• More difficult to finance
• Whole turnover requirement
If you have a credit insurance policy and also use letters of credit, you will
need the policy to recognise that you will not insure (or pay premium
on) confirmed irrevocable letters of credit.
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Chapter 9
Claims and how to make them (succeed)
So, you have insured and the day that you hoped would never arrive has
just started; your customer has not paid you, or perhaps your contract is
frustrated by political events beyond your control and you have incurred
costs which you will not be able to recover. You will want to make a
claim on your policy. Probably the first thing to say is that if you think
you have suffered an insured loss, then you should make a claim. Some
insureds take great pride in the fact that their premium rates are kept
low because their trading is seen as being low risk because they never
make a claim. Well, that is just fine, but if you always sell to first class
customers, and never take a risk by selling to less strong customers,
are you expanding sales? You need to speculate to accumulate, and in
any case, if you are spending thousands or hundreds of thousands of
pounds buying insurance, then you have a right to seek its protection
when the going gets tough. A good claims record with your insurer
is a worthy aspiration but don’t let it prevent you from calling on the
insurance when you need to.
How do you go about making your claim? How can you improve the
chances of your insurer paying the claim? What do you want to avoid
doing at this difficult stage?
What is in the policy?
Your policy will place on you certain obligations such as the need
to obtain a credit limit in order to have cover on a customer, to pay
premium, to report late payments and to submit your claim by a certain
time. If you don’t get a credit limit, then you will not be covered; if
you are late reporting an overdue or submitting a claim, then you can
probably wave good-bye to your claim. If you don’t pay your premium,
there is no ‘probably’ about it. Whilst there may be a temptation to
regard the small print as just so much waffle, this would be a mistake; it
really does make sense to make the most of the policy when you need
it most – and you can only do that by complying with the conditions
of the policy.
Overdue reporting
Credit insurers set a time period during which to report any overdue
payments (and events likely to give rise to a loss under the policy, which
might be a different event). These time limits will be based on the
contractual due date of payment (or the date of the event). All overdue
payments must be reported within a specified number of days from
the due date (often described as the expiry of the maximum extension
period). This enables the insurer to recommend early action for collecting
the debt. It is generally acknowledged that early debt-recovery action
equates to effective debt-recovery action. The insurer also uses this
information as a risk indicator – if another exporter is insuring trade
with the same customer, your insurer can provide feedback so that the
exporter exercises caution.
Claims
All claims will have to be made within a specified number of months
from the due date but within this period you can decide for yourself
when you wish to claim. It is useful to set up a diary system which can
be computerised and added to the ledger to plot the key deadline dates
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specified in the policy for reporting overdue accounts to the insurer and
submitting claims. If you receive a letter from an insolvency practitioner
notifying you of an insolvency (or similar), the decision on when to
claim has made itself. Failure to make your claim within the specified
period will normally allow the insurer to refuse your claim. This may
seem unreasonable but the insurer will have laid off some of the risk
with his reinsurers and will be operating under a similar obligation to
report claims to them within a specified period.
What documentation will the insurer want to see?
• A fully completed and signed claim form
• Contractual documents: eg copy invoices, shipping documents,
proof of despatch, purchase order, a copy of any guarantee of
payment, copies of any negotiable instruments such as bills of
exchange or promissory notes
• A summary of the circumstances surrounding the loss
• A statement of account and details of the amounts outstanding
• Evidence of your debt chasing (including simple notes of telephone
conversations that you make to chase the debt)
• A copy of your credit limit decision, where the insurer provided the
credit limit, or agency report upon which a discretionary limit was
based and a copy of the recent trading history
• Where insolvency has occurred, evidence of the insolvency, including
registration of your debt and acceptance of it by the appointed
liquidator or receiver
• If your insurer required you to retain title to your goods, they will want
to see proof that you have enforced (or tried to enforce) your rights
• Details of when the contract was declared and for how much and
when you paid your premium
• Any other information that is relevant to the claim
You might find it useful, when setting up your credit insurance
procedures, to identify how and where these documents are kept and
to ensure that they can be easily retrieved.
There is unlikely to be anything on this list that comes as a surprise. It
is all fairly predictable stuff, and quite reasonable too.
Claims are processed for payment when all the documents have been
supplied, the insurer’s claims examiners have done their work and the
claims waiting period is over. This period will vary from insurer to insurer
and from cause of loss to cause of loss. Insolvency losses are typically
paid immediately, while protracted default (where your customer just
will not pay) is normally payable at 6 months.
If your insurer is contributing to the cost of chasing or recovering
the debt, then that contribution will probably be added to the claim
payment. Increasingly, insurers are seeking to relieve companies of
administration in the area of debt recovery and may offer to take over
an overdue debt on a ‘no success, no fee’ basis.
An insurer declined liability, under a bond unfair calling policy, for a bond
which the customer in Taiwan was threatening to call in full. In court the
exporter admitted partial fault and negotiated a settlement including an
amount that the customer could retain. In view of the fact that the exporter
had attempted to mitigate loss by taking the beneficiary of the bond to court,
and prevented a full call, the insurer contributed to the court costs.
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Not all claims are clear-cut. If your customer disputes his obligation
to pay, then the insurer will be entitled to defer admitting liability until
such time as you have resolved the dispute to the insurer’s satisfaction.
This might involve going to arbitration or to court to prove that your
customer owes you the money because you have performed the contract
(most disputes revolve around the customer alleging non-performance
by the exporter).
An exporter supplied goods including electrical cables. The buyer argued
that the goods were not fit for purpose because the cable supplied was
insufficiently rodent-proof. The counter-argument was that the buyer was
obliged to keep the jungle at least x metres from the cables, specifically to
prevent the local flying squirrels attempting the great leap. Considerable
debate revolved around the standing of the flying squirrel – was it a rodent?
When this was decided the road to arbitration was clear and eventually it was
possible to demonstrate that the buyer had allowed the jungle to encroach
within squirrel leaping range. The dispute was decided and a claim was paid.
Furthermore, the insurer contributed to the costs of arbitration.
Recoveries / Salvage
Of course, your work does not stop when you are paid a claim. The
insurer will employ people whose sole interest in life lies in seeking to
recover debts on which claims have been paid. It is not only their job
to do so, it is their joy. Just as the debt is owed to you, the exporter,
so the recovery has to be undertaken in your name. That will require
your involvement, and it would be good to recall that your obligations
to the insurer do not come to an end when your claim is paid. Indeed,
failure to act in accordance with the insurer’s directions at this stage
would entitle the insurer to recover the claim payment from you. It is
important to remember that:
• Any recoveries received after payment of a claim will need to be
shared with the insurer proportionately (eg 90/10)
• The insurer will usually contribute to recovery expenses, including
legal fees incurred in pursuit of the debtor, in the same proportion as
it admits liability
• Some insurers will contribute to recovery costs even if the customer
pays if the exporter can demonstrate that the action avoided the
need to pay a claim
The trigger for a default claim in Dubai was the arrest of the customer, in
the exporter’s presence, on suspicion of smuggling/funding nuclear parts to
a terrorist operation in Pakistan. The customer had the cheque to pay the
exporter in his possession at the time of the arrest. The invoices amounted
to USD900,000. Had the exporter visited the customer a day earlier, the
cheque would have been handed over and the debt cleared. The insurer
paid the claim and this smoothed the exporter’s cash-flow. The next step for
the insurer, who was naturally keen to make a recovery, and for the exporter
who wanted to keep his premium rate down in the following year, was to
commence recovery action. Working together the exporter, the insurer
and a lawyer were able to enforce various rights under the contract and the
liquidator of the customer’s operation eventually paid in full, after two years.
Eight easy ways to lose your claim
The ability to make a claim is why you buy credit insurance, but
it can be a complex process, requiring a good eye for detail. There
are many reasons why claims fail but it is usually down to poor policy
management. Exporters should be aware of the following pitfalls and
develop a strategy for avoiding them. Insurers will say that they have
no interest in turning down a claim simply because an insured exporter
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fails to comply with a small point of detail in the policy. And they
are right. Their prospects of winning further business are done no
good at all by developing a reputation for not paying claims. On the
other hand, the insurers do have responsibilities to their reinsurers (and
shareholders) and cannot be expected to pay claims which would not
have arisen if it had not been for the exporter’s failure eg to chase a
debt in good time.
Having said that, let us look at the most common reasons for insurers
rejecting claims.
1 The credit limit
• You don’t have one
• The loss occurred before the cover started, or after the credit limit
expired
• The wrong customer. Unfortunately, a common one, this – see
Chapter 6. The exporter fails to check the detail on the credit limit
eg by reference to his customer’s registration number. Sometimes
the exporter will fail to report a change in the customer’s style or
registration during subsequent trading
• Trading on terms of payment which are more favourable to the
customer than those approved on the credit limit decision or in
the policy. This would include trading on open account terms
when the insurer had specified a letter of credit or agreeing
longer terms than are approved. Remember that “30 days from
invoice”, is a shorter period than “30 days end of month”
• Trading in excess of the credit limit; the insurer was willing to take
a risk at £10,000 but you traded so that the customer owed you
£30,000 when he went bust – did your over-trading cause the
bankruptcy?
A credit limit was given on one company in Canada, yet the exporter
contracted with another, related, company. Whilst the two companies
concerned were in the same group, there were significant differences since
the one company (which the insurer had underwritten) had robust finances
while the actual customer did not. When the group went into administration,
the robust company paid out a substantial dividend whereas no dividend was
expected or received from the actual customer. Additionally, there were two
large gaps in the presentation of the trading history. The claim was declined
but the credit insurer made an ex gratia payment of 50% of the loss.
2 Lack of a contractual right to be paid
• Your contract and/or your invoice is not clear as to when payment
should be made – after all, if you don’t know when you should be
paid, how will you know when you haven’t been paid?
• The customer disputes the amount owing – the insurer will wait
till you have established the customer’s obligation to pay you
• You are unable to resolve a dispute
• If the payment terms in the contract are “by letter of credit”, and
you do not submit conforming documents to the bank, so that
payment is not forthcoming, you are unlikely to be able to claim
on your credit insurance policy if the customer does not pay
3Reporting
• You omit to report information that is material to the insurer’s
perception of the risk when you are applying for a credit limit or
during the contract performance. You can expect the insurer to
know published financial information, but he will not necessarily
know your previous trading history with the customer
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• You fail to report overdue payments by the time specified in the
policy (eg 60 days from due date), or to report immediately nonpayment at extended due dates or to report events which might
lead to a loss
• You fail to seek the insurer’s approval of a re-scheduling of
payment, or agreeing to write off part of the debt in exchange
for settlement
4 Imprudent trading
• You continue to despatch when payment is late, in respect of either
insured or uninsured business with the customer. Remember that
the maximum extension period is usually specified as a number of
days. If it says 60 days, it does not mean 2 calendar months
5 Collections activity
• Credit insurers have undertaken studies of the likelihood of a
successful collection compared with the number of days after
due date before collection activity is commenced. The statistics
are compelling, to the extent that some credit insurers will pay
a claim at a higher percentage indemnity if collection action is
started early. If you delay starting recovery action, you can expect
the insurer to take a robust approach to your claim
• If payment is to be “by bill of exchange”, then any unpaid bills of
exchange must be protested in accordance with local law and in
due time
• Failure to act in accordance with your insurer’s recommendations.
If the insurer recommends a particular lawyer or debt collector,
you would do well to act on this advice or put forward a very
good case for an alternative, and get this agreed in writing. At
the very least, the insurer will probably have negotiated a scale of
rates with their chosen lawyer or debt collector and even if they
agree to you using another firm, they will want to restrict any
payment for fees to what their firm would have charged
6 Premium
• For exporters who pay premium in arrears (most other insurers
will charge premium in advance) it is wise to have declared the
contract/despatch and to have paid the premium before you
make a claim – insurers are funny like that
7 Claims administration
• You are unable to supply all the documents required for a claim
• You don’t submit your claim within the required time-scale
• If your customer has become bankrupt or insolvent, you are
unable to obtain from the insolvency practitioner confirmation
of the amount of the debt that is owed to you (this piece of
administration is vital if you or the insurer are to be eligible to
receive a dividend from the insolvent estate)
• The amount is less than the first loss, retention or threshold on
your policy
8Retention of title
• This item should be the first on your list, not the last; if you get
to a claim situation and realise that your retention of title clause
was “simple” when the policy required you to have a “complex”
clause, then you will have a challenging discussion with your
insurer’s claims people. This is a complex area, and for this
reason, BExA has published a guide on Retention of Title Clauses
in Export Contracts.
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Having read enough to make you think that you will never be able to
make a good claim, it is worth asking yourself the question: Should
I still claim, even knowing that I have not complied exactly with the
policy? The answer is a clear: Yes, however poor your case seems to
be. With assistance from your broker, you may be able to negotiate a
settlement. If the claim is steadfastly refused, you will be able to inform
your management and your auditors and, armed with the reasons given
for the claim not being paid, you can change your credit management
procedures. At the very least, you will have learned a hard lesson, but
you will not lose a claim for the same reason a second time.
To be very clear, insurers do not look for ways to avoid paying claims.
It is not in their interest to do so. That is not the same as paying claims
for which there is clearly no liability, especially if the failure can be laid
at the exporter’s door. So, as in most things, you are the best guardian
of your own interests.
An insurer avoided liability because of over-trading and collusion with the
customer. The exporter had continued to supply goods up to the credit limit
despite the customer failing to pay for earlier supplies. There was a suspicion
that he did this so that his customer could use the goods as stock for funding
his debts. The case went to court and the judge found in favour of the
insurer. This is not so much an example of an interesting claim as a warning
that fraud is a dangerous game.
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Appendix 1
Lexicon
Acceptance Certificate
A document which evidences the fact that goods have been delivered to a
purchaser or lessee and accepted by that purchaser or lessee; or that services
have been provided to and accepted by a principal.
Agent
An individual or organisation which acts on behalf of a principal, either disclosed
or undisclosed.
Aggregate First Loss/Aggregate Deductible/Deductible
An aggregation of losses necessary before a claim will be paid under an insurance
policy.
Amount Owing
Payment due to a seller from a customer under a contract.
Annual Aggregate Deductible
See Aggregate First Loss.
Arbitration
A formal procedure for resolving a dispute eg by the London Court of International
Arbitration.
Bankruptcy
UK: the insolvency of an individual rather than of a company.
US: all forms of company and personal insolvency are described in the US
Bankruptcy Code.
Bill of Exchange (sometimes known as a Draft)
An unconditional undertaking to pay a specific amount to another party on a
certain date; a negotiable instrument. The Bills of Exchange Act 1882 provides
a full definition. A Draft is a Bill of Exchange which has been accepted by the
Drawee (the customer).
Bond
A payment undertaking given by one party (usually a bank or insurance company)
to another in respect of obligations undertaken or to be undertaken by a third
party. Sometimes referred to as a Bank Guarantee or Surety Bond.
Broker (Insurance)
An intermediary acting on behalf of a client, but with duties and obligations to
both client and insurer. In the UK, insurance brokers are regulated by the FSA.
Buyer Risks
A collective term used to describe the potential insolvency/bankruptcy of a
customer, potential non-payment by a customer of amounts owing to an
exporter.
Cargo Insurance
Insurance against the physical loss of goods whilst in transit from one location to
another – otherwise known as transit or transportation or marine insurance.
Cash Against Documents (CAD)
A payment term which requires the exporter to send the shipping documents
to the customer’s bank, and requires the bank to release the documents to the
customer only against payment. More secure than open account.
Cash Flow
The cash position of an organisation at any point in time.
CEN
Acronym used to describe political risk cover against the Confiscation and/or
Expropriation and/or Nationalisation of assets held in or passing through a
foreign country.
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CIF
Cost Insurance & Freight. A term of delivery requiring the exporter to arrange
and pay for the carriage and insurance of goods to a port of destination, and to
provide the customer with the documents necessary to obtain the goods from
the carrier. See INCOTERMS.
Collection, Documentary Collection
A payment term which requires the exporter to send the shipping documents
to the customer’s bank with a bill of exchange and requiring the bank to release
the documents to the customer only against acceptance of the bill of exchange.
More secure than open account and allows the customer a period of credit after
signing the bill.
Commercial Risks
See Buyer Risks.
Companies House
The official UK government register of UK companies.
Confiscation Cover
See CEN. Sometimes used as a collective description of the component parts of
CEN cover.
Contract Effectiveness
A contract is binding on both parties only when all the specified conditions
precedent for effectiveness have been met.
Credit
Usually used to describe the period under a contract before which payment is
required to be made by a customer following the presentation of an invoice,
delivery of goods or other event agreed in the contract.
Credit Limit
A specific maximum amount of exposure to a customer. A company can agree
its own credit limits, which may or may not be the same as has been approved
by the insurer.
Credit Risk
The risk that the customer will not pay the amount due within the agreed
contractual term. Sometimes used to denote the commercial or buyer risk on a
customer as opposed to the political risk on a country. Also sometimes used to
distinguish the payment risk from the Pre-Credit Risk.
Currency Fluctuation
The movement of the price of stated currencies in relation to each other.
Datum Line
A term used by credit insurers to denote an exposure to any one customer
below which there is no cover. The arrangement usually provides that when the
exposure reaches the specified Datum Line, cover will incept and continue even
if the exposure subsequently falls below the Datum Line.
DDP
Delivered Duty Paid – defined in INCOTERMS.
DDU
Delivered Duty Unpaid – defined in INCOTERMS.
Deductible
See Aggregate First Loss.
Default
A term usually used to denote the failure of a customer to pay an amount owing
under a contract. Government default usually means failure of a government
buyer to fulfil any term of a contract.
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Despatch
Credit insurance tends to define the start of the payment or credit risk as being
on despatch, and despatch will be defined in the policy. Despatch will relate to
the physical movement of goods and not when the risk passes (which is covered
by INCOTERMS) or when you no longer have title to the goods (see the BExA
Retention of Title Guide for more information on this).
Discretionary Limit
A facility by which an insured can establish his own credit limit on a customer,
subject to certain conditions.
Dispute
The accusation by the seller or the buyer that the other has breached one or more
of the terms of the contract.
Domestic Sales
In the UK this usually means sales between a UK seller and a UK customer, even if
the goods originate from outside the UK.
Draft
see Bill of Exchange
Due Date of Payment
The date upon which payment is agreed to be made under a contract of sale and
the earliest date in a transaction when the customer can be sued for non-payment.
The date can be extended as agreed between the parties to the contract.
ECA
An official Export Credit Agency, eg ECGD in the UK, COFACE in France.
ECGD
Export Credits Guarantee Department. The UK Export Credit Agency.
EXIP
ECGD’s Export Insurance Policy. A credit insurance policy offered by ECGD to
cover a specific contract for buyer and political risks.
Export Licence
A government document that permits the licensee to export designated goods
to certain destinations. In the UK, licences to export defence equipment,
technology, artworks, plants and animals, medicines and chemicals are issued by
the Department for Business Enterprise and Regulatory Reform acting through
the Export Control Organisation (ECO).
Exposure
A term used to describe the amount of money for which an exporter is at risk on a
customer or country at any one time. This can cover a number of deliveries.
Factoring
The selling of a company’s accounts receivable, at a discount, to a factor, which
then assumes the credit risk of the debtors and receives cash as the debtors settle
their accounts. Also called accounts receivable financing.
Foreign Exchange Risk
The risk associated with dealing in more than one currency.
Ground up Cover
A term used to describe cover which does not involve an Aggregate First Loss.
Horizon of Risk
The overall period of risk relating to a contract or investment, including the PreCredit Risk and Credit Risk periods.
ICC
International Chamber of Commerce.
Import Licence
A government document that permits the licensee to import designated goods
from certain countries.
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Incoterms
Standard definitions of delivery and are most commonly used in international sales
contracts. Devised and published by the International Chamber of Commerce.
The current edition is Incoterms 2000.
Indemnification
The process of an insurer paying to the insured the agreed percentage of a
claim.
Insolvency
The condition of being unable to pay debts when they are due. Insolvency is
usually defined in law in each country.
Invoice Discounting
The sale for cash of approved invoices to a financial institution. Invoice discounting
differs from factoring in that it is usually confidential and the exporter does not
lose control of the sales ledger and existing methods of credit control.
Invoice Financing
A general term to describe using the various processes whereby a financial
institution transforms unpaid invoices into working capital (eg factoring, invoice
discounting).
Legally enforceable
An agreement the breach of which can be sued upon in a court of law.
Letter of Credit
A document issued by a bank on behalf of a customer, by which the bank
undertakes to pay the beneficiary (the seller) within a stated time period, up to a
stated amount of money, against the production of specific documents. (See the
BEXA Guide to Letters of Credit updated for UCP600).
Liquidated Damages
A sum of money specified in a contract to be paid by one party to the other in the
event of a breach of contract.
Liquidation
Sale of the assets of a business to pay off its debts.
Losses Occurring
An insurance term used to explain that a policy will cover losses that happen
during the policy period - the alternative being Risks Attaching.
Loss Payee
A clause in an insurance policy which requires the insurer to pay the proceeds of
a claim to a person (usually a bank or other financial institution) other than the
insured.
Maximum Liability
An amount stated in an insurance policy which represents the maximum amount
payable by the insurer in the event of a claim or series of claims during the policy
period.
Method of Payment
The means by which a payment is made under a sales contract eg telegraphic
transfer, Letter of Credit, Bill of Exchange – see also Terms of Payment.
Milestones
Important identifiable stages in a contract, particularly a project, at which
obligations of the exporter and/or customer are required to be fulfilled before a
payment becomes due.
Non Qualifying Loss
A small value loss, in the context of an insurance policy, which is not considered
‘qualifying’ for a claim or as part of an aggregate of losses.
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Non Recourse or Without Recourse.
A term used in trade finance to indicate that payments made by a financial
institution to an exporter in respect of goods or services supplied to a customer
will not be refundable in the event that the customer does not pay.
OECD
Organisation for Economic Co-Operation & Development - a group of
governments of countries committed to democracy and the market economy.
Amongst many other things, the OECD sets guidelines that ECAs of member
countries are expected to follow when providing official support for export
credits.
Open Account
A payment term which grants the customer credit and which requires it to pay
the exporter at a future date, typically ‘x’ days after delivery or ‘y’ days after
invoice date.
Payment Terms
The contract terms agreed between the parties defining both when the debt
falls due and how payment will be made. See also Open Account, Cash Against
Documents, Collection, Bill of Exchange, Letter of Credit.
Performance Risk
The risk of one of the parties failing to perform the underlying purpose of a
contract; a term usually used to distinguish such from credit and political risks.
Political Risks
The risks associated with the country of the customer, the supplier’s country, or a
third country, rather than the customer itself.
Pre-Credit Period
The period between the date the contract becomes effective and the date when
the credit period commences under the contract. Sometimes used generically to
include the term pre-shipment risk (sometimes known as manufacturing risk or
work-in-progress) which is more specifically the date between effective date of
contract and the date of shipment.
Pre-Credit Risk
The risk of loss during the pre-credit period. Sometimes used generically to
include the term Pre-Shipment Risk or Work-in-Progress (and is sometimes known
as Manufacturing Risk).
Premium (rate)
The charge applied to a risk by the Insurer. The cost of buying the insurance.
PRI
Political Risk Insurance.
Promissory Note
A negotiable instrument, similar in effect to a Bill of Exchange, being an
unconditional promise to pay a sum of money on a specified date, drawn in
favour of the seller, by the customer.
Protracted Default
Default on a payment beyond what might be generally accepted as a normal
delay.
Public Buyer
A customer deemed by the insurer to be part of the state, such as Government
Departments and local authorities. The theory is that a public buyer cannot be
made insolvent. Most credit insurers follow the rule that a company owned by
the government is not a public buyer, but definitions vary. This is classed as a
political risk.
Receivables
Amounts due to be received by the seller from the customer.
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Recourse or With Recourse
A term used in trade finance to indicate that payments advanced by a financial
institution to an exporter in respect of goods or services supplied to a customer will
be made only against specified performance by the exporter under the contract,
those payments to be repaid in the event of any subsequent non-payment by the
customer – the opposite being Non Recourse.
Recoveries or Salvage
Following a claim, any money recovered from the customer or administrator of
a customer that has become insolvent, or from any guarantor or from resale of
goods or more recent trading.
Recovery Costs
Costs, including legal costs, incurred in pursuing recoveries/salvage.
Reinsurance
An insurer will usually retain only a proportion of risks, laying off the balance of a
risk with reinsurers. This ensures that an insurer is not over-exposed to one risk
sector or country in the event of significant loss.
Rescheduling
An agreement between exporter and his customer (ideally with a credit insurer’s
instruction/approval) that the payment(s) under a contract will be deferred until
a later determined date(s). May also apply to the debts owed by one country
to another.
Retention of Title (RoT)
A Retention of Title clause in a sales contract allows a supplier to delay the passing
of ownership in goods supplied to a customer until the customer has paid in full.
See the BExA Guide to Retention of Title Clauses in Export Contracts.
Risks Attaching
An insurance term used to explain that a policy will pay a claim resulting from
risks commencing during the policy period, even if the actual loss occurs outside
the policy period – the alternative being Losses Occurring.
Seller’s Interest Insurance
Insurance to cover the contingent risk that a customer contractually responsible
for insuring goods in transit has failed to do so, and the exporter would otherwise
loses money.
Short Term Cover
Cover for sales which do not usually exceed terms of payment of 180 days
credit.
Single Situation
Cover for one risk only. Also known as specific account cover – see Whole
turnover cover.
Stocks
The holding of a stock of goods or equipment in an overseas country, title
remaining with the exporter.
Terms of Payment
A description in a sales contract as to when, where and how payment is to be
made eg 100% in Sterling in the UK within 30 days of date of invoice – see
Method of Payment.
Top Up Cover
The provision of an additional layer of cover above that provided by the principal
insurer.
Trade Finance
A term embracing all forms of finance for trade sales such as factoring, invoice
discounting etc.
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Trading History/Experience
The experience of a seller (whether insured or not) in managing payment risk
on a given buyer. A record of invoices presented to and paid or unpaid by a
customer.
Uniform Commercial Code
Commonly referred to as UCC. A set of legal statutes adopted in the United
States to provide consistent and uniform laws for conducting business.
Uninsured Percentage
The amount of risk retained by the insured. Under a whole turnover policy this
can be 10%.
Waiting Period
The time between a loss occurring and a claim becoming due to be paid by an
insurer.
Whole Turnover Cover
The principle by which an exporter agrees to insure all (or substantially all)
overseas sales. The insurer, in turn, takes a theoretical spread of risk and thereby
is able to provide a rate of premium which reflects this spread and which is lower
than a rate that would a pply only to a selection of more risky business.
DISCLAIMER – this Lexicon is designed to provide, in general terms, a
description of some of the acronyms, words and phrases used in this guide.
The descriptions should therefore not be regarded as legally or commercially
precise, and readers are advised to speak to their professional advisors if they
require legally enforceable definitions.
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Appendix 2
CONTACT DETAILS
BExA
The British Exporters Association is an independent trade association
representing all sectors of the export community. Established in 1940
as the National General Export Merchants Group, it became the British
Export Houses Association in 1961. With the admission of manufacturers
into membership, it assumed its present name in 1988.
Membership is open to all companies and other organisations resident
in the United Kingdom who export goods or services, or who provide
assistance to such companies in the promotion and furtherance of
export activities.
The Association
• lobbies for exporters at Westminster and in Brussels
• influences the decision makers
• provides an information exchange for members
• provides an informed forum for British exporters.
The Association is also geared to the requirements of British export
houses ie non-manufacturing exporters. It brings together the export
interests of manufacturers, export houses, bankers and export credit
insurers.
The British Exporters Association
Broadway House
Tothill Street
London
SW1H 9NQ
Tel: 020 7222 5419
Fax: 020 7799 2468
bexamail@aol.com
www.bexa.co.uk
ACE European Group
With an established presence in 19 countries and operations in a
further 29 countries, ACE European Group provides a range of tailored
insurance solutions for a diverse range of clients.
ACE European Group
The ACE Building
100 Leadenhall Street
London
EC3A 3BP
Tel: 020 7173 7000
Fax: 020 7173 7800
www.aceeuropeangroup.com
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AIG
American International Group Inc, world leaders in insurance and
financial services, is the leading international insurance organisation
with operations in more than 130 countries and jurisdictions. AIG
companies serve commercial, institutional and individual customers
through the most extensive worldwide networks of any insurer.
AIG Europe (UK) Limited is one of the largest companies
specialising in the UK business insurance market.
Based in
London and with offices throughout the country, they include
over half the top 1000 UK companies amongst their clients as
well as many public sector organisations and smaller businesses.
Over the past 50 years they have established an enviable reputation for
developing innovative products that keep in step with new trends and
directions in business.
The AIG Building
58 Fenchurch Street
London
EC3M 4AB
Tel: 020 7954 7000
Fax: 020 7954 7001
Aon Trade Credit
Aon Trade Credit is the market leader in respect of credit insurance
broking with some 76 offices in 34 countries. It specialises in credit and
political risk insurance and trade finance and has six offices in the UK.
Aon Trade credit offers:
• Technical expertise in risk evaluation, design and servicing of credit
insurance policies
• Unrivalled leverage within the credit insurance market ensuring the
most competitive terms are negotiated in respect of cost, coverage
and service
• Objective advice and "one-stop-shop" in respect of trade receivable
finance and credit insurance
• A global network ensuring local knowledge and service, including
dedicated sector expertise
• Ongoing policy and claims service and one point of contact
• Complementary advice and services including trade finance,
business intelligence, debt collection, political risk insurance and
bond solutions
Aon Trade Credit
8 Devonshire Square
London
EC2M 4PL
Tel: 020 7882 0146
Fax: 020 7882 0497
www.aon.co.uk/tradecredit
atc@aon.co.uk
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Atradius
With decades of experience and a wealth of risk assessment knowledge,
Atradius offers a comprehensive range of credit management solutions
that protect businesses of all sizes against the commercial and political
risks inherent in domestic and global trade.
By insuring trade receivables, their customers reduce exposure to bad
debt, ensuring a more stable cash flow and effectively turning risk
capital into growth capital. Their focus is on expanding their product
portfolio with innovative credit management solutions and product
enhancements.
Atradius’ mission is to drive the growth of the market for trade credit
protection and provide their customers, partners, investors and people
with every opportunity to realise their ambitions for sustainable
growth.
They will realise their customers’ growth ambitions by:
• making their products, services and people as relevant and accessible
as possible to all their customers through market-driven product
design and an optimal route to markets
• providing best-in-class risk management and customer service
• being present in all markets where their customers have significant
business interests through further expanding their geographical
presence
Atradius Credit Insurance
3 Harbour Drive
Capital Waterside
CARDIFF
CF10 4WZ
Tel: 029 2082 4000
Fax: 029 2082 4003
www.atradius.co.uk
info.uk@atradius.com
Berne Union
The Berne Union, or officially, the International Union of Credit & Investment
Insurers, is the leading international organisation and community for
the export credit and investment insurance industry. The Berne Union
and Prague Club combined have more than 70 member companies
spanning the globe. They share a Secretariat based in London.
The Berne Union actively facilitates cross-border trade by
supporting international acceptance of sound principles in
export credits and foreign investments and by providing
a forum for professional exchanges among its members.
The Berne Union and its members provide a vital link in the chain of
world trade. Through their involvement in supporting the financing
and credits required for projects, both large and small, they make trade
happen. Berne Union members occupy a key position in global trade
markets, where they covered US$788 billion worth of business in 2004,
about 10% of the world’s total export trade.
www.berneunion.org.uk
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BERR
The Department for Business Enterprise and Regulatory Reform leads
work to create the conditions for business success through competitive
and flexible markets that create value for businesses, consumers and
employees. It drives regulatory reform, and works across Government
and with the regions to raise levels of UK productivity. The Department
leads on making sustainable improvements in the economic
performance of the regions. It is jointly responsible, with DfID and
the FCO respectively, for trade policy, and trade promotion and inward
investment.
1 Victoria Street,
London
SW1H 0ET
Tel: 020 7215 5000
www.berr.gov.uk
enquiries@berr.gsi.gov.uk
BPL
BPL GLOBAL is a founder member of the GLOBAL network of
independent specialist trade credit and political risk insurance brokers
serving exporters, international traders and investors, banks and
financial institutions.
BPL GLOBAL acts for policyholders, based on its experience extending
over 24 years and more than 200 successfully negotiated trade credit
and political risk insurance claims. It arranges credit insurance for all
types of trade-related payment obligations, with a particular focus on
emerging market risks. Additionally, BPL GLOBAL handles the full range
of terrorism and political risk insurance products covering physical
assets, investments, cross-border loans and personnel.
BPL GLOBAL
150 Leadenhall Street
London
EC3V 4TE
Tel: 020 7375 9600
Fax: 020 7929 4499
www.bpl-global.com
enquiries@bpl-global.com
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British Bankers’ Association
The BBA is the voice of the Banking industry for all banks which operate
in the UK.
More than 60 nationalities are represented amongst their 200 members,
they collectively operate 130 million personal accounts, have over £6
trillion of assets, are the fastest growing sector in the UK, have created
jobs either directly or indirectly for 4 million people, contribute £50 billion
to the UK economy and last year processed 7 billion transactions.
This truly impressive set of statistics not only indicates just how important
the banking industry is to the UK economy but also graphically displays
why the UK is the largest global centre for cross border banking
services.
British Bankers’ Association
Pinners Hall
105-108 Old Broad Street
London
EC2N 1EX
Tel: 020 7216 8800
www.bba.org.uk
info@bba.org.uk
Coface
Coface is one of the world’s leading providers of credit management
services. Through a direct presence and partners in the international
CreditAlliance network, the group offers a local service in 93 countries
and information on 50 million companies worldwide. A wholly owned
subsidiary of Natixis, a leading French corporate and investment bank,
Coface is rated AA+ by Fitch, AA by Standard & Poor’s and Aa3 by
Moody’s.
Coface’s services in the UK and Ireland include domestic and export
credit insurance, collections management, receivables finance (not yet
in Ireland), surety and credit information. The company operates from
5 offices in the UK – London, Birmingham, Watford, Cardiff and Belfast
– and from Dublin in Ireland.
Coface in the UK and Ireland is authorised in France by the ‘Commission
de contrôl des assurances, des mutuelles et des institutions de
prévoyances’ (CCAMIP) and regulated by the Financial Services Authority
for the conduct of UK business. The company is also a member of the
Credit Services Association and the Asset Based Finance Association.
Coface
Egale 1
80 St Albans Road
Watford
Hertfordshire WD17 1RP
Tel: 01923 478100
Fax: 01923 478101
enquiries@cofaceuk.com
www.cofaceuk.com
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Companies House
The main functions of Companies House are to:
• incorporate and dissolve limited companies;
• examine and store company information delivered under the
Companies Act and related legislation; and
• make this information available to the public.
The United Kingdom has enjoyed a system of company registration
since 1844. Today, company registration matters are dealt with in law,
by the Companies Act 1985 and the updating legislation contained in
the Companies Act 1989.
All limited companies in the UK are registered at Companies House,
an Executive Agency of the Department for Business, Enterprise and
Regulatory Reform (BERR). There are more than 2 million limited
companies registered in Great Britain, and more than 300,000 new
companies are incorporated each year.
Companies House
Crown Way
Maindy
Cardiff
CF14 3UZ
Tel: 0870 33 33 636
www.companieshouse.gov.uk
Ducroire Delcredere
Ducroire Delcredere SA NV was formed in 2004 by ONDD, the Belgian
national Export Credit Agency. It now undertakes the short term credit
and political risk business for Belgian exporters and for other companies
based in the European Union and in Switzerland.
Ducroire Delcredere specialises in emerging markets and it is able
to agree open account terms in more than 200 countries. It has
considerable experience in riskier markets having a history in these
markets from 1921. Ducroire Delcredere rates each country in terms of
credit and political risk and the ratings can be found on its website.
Ducroire Delcredere tailor makes policies for exporters, whether for
commodities sales or for those on contracting terms. Contact with the
company is through specialist brokers and the UK Director is Andrew
Strong.
Tel:01932 268442
www.ducroiredelcredere.eu
a.strong@ducroiredelcredere.eu
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ECGD
ECGD’s role is to benefit the UK economy by helping exporters of UK
goods and services win business, and UK firms to invest overseas, by
providing guarantees, insurance and reinsurance against loss, taking
into account the Government’s international policies. ECGD’s statutory
powers are set out in the Export and Investment Guarantees Act 1991.
ECGD’s objectives are:
• to achieve the Financial Objectives set for it by Ministers;
• to operate in accordance with its Business Principles, so that its
activities accord with other Government objectives, including those
on sustainable development, human rights, good governance and
trade;
• to promote an international framework that allows UK exporters
to compete fairly by limiting or eliminating all subsidies and the
adoption of consistent practices for assessing projects and countries
on a multilateral basis;
• to recover the maximum amount of debt in respect of claims paid by
ECGD in a manner consistent with the Government’s policy on debt
forgiveness;
• to ensure ECGD’s facilities are, in broad terms, complementary to
those in the private sector;
• to provide an efficient, professional and proactive service for
customers which focuses on solutions and innovation; and
• to employ good management practice to recruit, develop and retain
the people needed to achieve the Department’s business goals and
objectives.
Tel: 020 7512 7887
Fax: 020 7512 7649
www.ecgd.gov.uk
help@ecgd.gsi.gov.uk
Euler Hermes
Euler Hermes is the world’s leading credit insurer. It protects businesses
of all sizes and in all sectors against insured trade credit risk, including
political risk, whenever and wherever it occurs. Unparalleled risk
experience acquired through its coverage of 40 million businesses
worldwide enables Euler Hermes to help many leading businesses and
multinational companies grow in export markets throughout the world.
Present in 49 countries, Euler Hermes is rated AA- by Standard & Poors
and is a member of the Allianz group.
Euler Hermes UK plc
1 Canada Square
London
E14 5DX
Tel: 020 7860 2734
www.eulerhermes.com/uk
sharon.giddings@eulerhermes.com
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Exporters Insurance Company
Exporters offers a broad range of both trade credit and political risk
insurances for companies and financial institutions involved in domestic
or international trade and investments.
Domiciled and licensed in Bermuda, they commenced operations in
1990 and currently underwrite out of New York and London.
Exporters has over USD60 million in capital and a portfolio of USD2.8
billion outstanding across 82 countries.
Exporters Insurance Company (Europe) Ltd
37-39 Lime Street
London
EC3M 7AY
Tel: 0207 256 3920
Fax: 0207 626 4693
www.exportersinsurance.com
gkent@exportersinsurance.com
HSBC Insurance Brokers
HSBC Insurance Brokers is one of the largest international insurance
broking, risk management and employee benefits organisations in the
world. They are the only major insurance broker that forms part of a
global banking group. As members of the HSBC Group they share an
international network with offices in countries and territories in Europe,
the Asia-Pacific Region, the Americas, the Middle East and Africa.
The group enables them to evaluate insurance in a broader business
sense with immediate access to specialist advice and services in areas
such as trade finance, cash and investment management, treasury and
foreign exchange, as well as processing services and financial controls
and disciplines.
HSBC Insurance Brokers has the depth of knowledge to analyse complex
risk situations from multiple perspectives and develop comprehensive
solutions that meet the specific needs of their clients.
HSBC Insurance Brokers Limited
Bishops Court
27/33 Artillery Lane
London
E1 7LP
Tel: 0207 247 5433
Fax: 0207 377 2139
insurancebrokers.hsbc.com
ICC
ICC (International Chamber of Commerce) is the voice of world business
championing the global economy as a force for economic growth, job
creation and prosperity. Because national economies are now so closely
interwoven, government decisions have far stronger international
repercussions than in the past.
ICC, the world’s only truly global business organization, responds by
being more assertive in expressing business views.
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ICC activities cover a broad spectrum, from arbitration and dispute
resolution to making the case for open trade and the market economy
system, business self-regulation, fighting corruption or combating
commercial crime.
ICC has direct access to national governments all over the world through
its national committees. The organization’s Paris-based international
secretariat feeds business views into intergovernmental organizations
on issues that directly affect business operations.
International Chamber of Commerce
38 cours Albert 1er
75008 Paris, France
Tel: +33 1 49 53 28 28
Fax: +33 1 49 53 28 59
For all enquiries on ICC publications
Marie-Dominique Fraiderik,
Customer Services
Tel: +33 1 49 53 29 23
Fax: +33 1 49 53 29 02
ICISA
The International Credit Insurance & Surety Association (ICISA) brings
together companies that write credit insurance and/or surety. ICISA
was founded in 1928 as the first credit insurance association and its
members now account for 95% of global credit insurance business.
Surety companies have been joining since the 1950s allowing the
association to grow into the leading international organisation in the
field of trade credit and surety bond insurance. ICISA members perform
a central role in facilitating trade, by insuring trade credit risks resulting
from local sales as well as from exports, or by providing security for the
performance of a contract. In 2005 ICISA members insured over 1.5
trillion USD worth of trade. The Association has members located on
five continents insuring risks in practically every country in the world.
ICISA promotes sustained technical excellence, industry innovation
and product integrity, as well as solving business problems generated
by legislation. It represents the interests of its members by facilitating
an open exchange of information, in conjunction with representing
the industry on an international level. ICISA advises international and
multinational authorities on vital issues related to the credit insurance
and surety bond industry.
The Secretariat
Herengracht 473
1017 BS Amsterdam
The Netherlands
Tel: +31 (0)20 625 4115
Fax: +31 (0)20 528 5176
www.icisa.org
secretariat@icisa.org
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The BExA Guide to Export Credit Insurance
Institute of Credit Management
The ICM is the largest professional credit management organisation in
Europe. Its 8,700 members hold appointments throughout industry and
commerce - in trade, consumer and export credit as well as in related
activities such as collections, credit reporting, credit insurance and
insolvency practice. The Institute’s aim is to raise professional standards
in credit management, and to increase awareness of its importance as a
crucial management function with a vital role in improving marketing,
profitability and cash flow.
Founded in 1939, the ICM is the centre of expertise in the United
Kingdom for all matters relating to credit management.
The Institute:
• sets professional standards, and tests and assesses those who wish to
become Members
• organises specialist education and training
• provides a range of services aimed at keeping credit managers up to
date
• consults with and makes recommendations to the Government,
European Commission, other professional bodies and trade
associations.
The Water Mill
Station Road
South Luffenham
Leicestershire
LE15 8NB
Tel: 01780 722900
Fax: 01780 721333
www.icm.org.uk
info@icm.org.uk
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The BExA Guide to Export Credit Insurance
Institute of Export
The Institute of Export is a Registered Charity. The Institute’s mission is
to enhance the export performance of the United Kingdom by setting
and raising professional standards in international trade management
and export practice. This is achieved principally by the provision of
education and training programmes.
Primarily comprised of individual members the Institute also has an
increasing Business & Corporate Membership and a growing list
of services and benefits designed to meet the various needs of all
membership categories.
Dedicated to professionalism and recognising the challenging and
often complex trading conditions in international markets, the Institute
is committed to the belief that real competitive advantage lies in
competence and that commercial power, especially negotiating power,
is underpinned by a sound basis of knowledge.
Export House
Minerva Business Park,
Lynch Wood,
Peterborough
PE2 6FT
Tel: 01733 404400
Fax: 01733 404444
www.export.org.uk
institute@export.org.uk
Newstead International
Newstead International is a member of global alliance of specialised
political and credit risk insurance brokerage firms located in Hong Kong,
London, Singapore and in several states of USA. Formed in 2001 the
Newstead Group’s member firms have substantial experience in working
with companies to support and facilitate their global trade needs.
A few areas in which they specialise are:
• Mitigating political and credit risks by creating comprehensive
insurance programmes with private or public insurance markets
• Developing trade finance programmes (pre and post shipment)
• Arranging operating and finance lease programmes
• Collateral development for public entity projects (eg World Bank)
• Protecting foreign investments against political risks
Newstead International Limited
Suite 104
95 Wilton Road
London
SW1V 1BZ
Tel: 020 7228 3033
Fax: 020 7228 2185
www.newsteadgroup.com
andrew.neill@newsteadinternational.co.uk
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The BExA Guide to Export Credit Insurance
OECD
The OECD brings together the governments of countries committed to
democracy and the market economy from around the world to:
• support sustainable economic growth
• boost employment
• raise living standards
• maintain financial stability
• assist other countries’ economic development
• contribute to growth in world trade
The OECD also shares expertise and exchanges views with more than
70 other countries.
For more than 40 years, the OECD has been one of the world’s largest and
most reliable sources of comparable statistics, and economic and social
data. As well as collecting data, the OECD monitors trends, analyses
and forecasts economic developments and researches social changes or
evolving patterns in trade, environment, agriculture, technology, taxation
and more. The organisation provides a setting where governments
compare policy experiences, seek answers to common problems, identify
good practice and coordinate domestic and international policies.
OECD work on trade provides analytical underpinnings to support
continued trade liberalisation and foster an understanding of trade
policy linkages of public concern. Trade and investment liberalisation
has proven to be both a powerful stimulus to economic growth and a
key factor in integrating an expanding number of countries in the world
economy.
The OECD’s Export Credit Division facilitates work relating to the policies
and practices of OECD member governments who provide officially
supported export credits.
OECD
2, rue André Pascal
F-75775 Paris Cedex 16
France
Tel: +33 1 45 24 82 00
Fax: +33 1 45 24 85 00
www.oecd.org
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The BExA Guide to Export Credit Insurance
Rattner Mackenzie Ltd
Rattner Mackenzie Ltd is a Lloyd’s registered specialist insurance
and reinsurance broker located in London, New York and Bermuda,
providing its clients with a wide range of options from secure markets.
Rattner Mackenzie’s experienced team delivers tailored solutions to
unique challenges.
During 2006 Rattner Mackenzie placed in excess of US$580 million
gross premium in worldwide markets.
The Trade Credit and Political Risk team specialises in working with
global companies to place their export risk across the whole range of
the trade credit and political risk insurance market.
Walsingham House
35 Seething Lane
London
EC3N 4AH
Tel: 020 7480 5511
Fax: 020 7481 3616
www.rattnermackenzie.com
SITPRO
SITPRO Limited, formerly The Simpler Trade Procedures Board, was
set up in 1970 as the UK’s trade facilitation agency. SITPRO is one of
the non-departmental public bodies for which BERR has responsibility.
It is dedicated to encouraging and helping businesses to trade more
effectively and to simplifying the international trading process. Its focus
is the procedures and documentation associated with international
trade.
The following strategic objectives underpin this mission:
• influencing the simplification of international trade procedures
• promoting best trading practices
• developing and promoting international standards for trade
documentation
• working towards better border regulations and the removal of
international trade barriers
SITPRO Ltd
7th Floor
Kingsgate House
66-74 Victoria Street
London
SW1E 6SW
Tel: 020 7215 8150
Fax: 020 7215 4242
www.sitpro.org.uk
info@sitpro.org.uk
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The BExA Guide to Export Credit Insurance
UKTI
UK Trade & Investment is the government organisation that supports
companies in the UK doing business internationally and overseas
enterprises seeking to locate in the UK.
Their role is to help companies realise their international business
potential through knowledge transfer, and on-going partnership
support. British companies looking to start up or expand their overseas
business interests, and organisations keen to operate in the number one
business location in Europe, will find UK Trade & Investment a valued
partner.
Their position within government, in-depth knowledge of UK regional
business and a global network make them a unique strategic resource.
UK Trade & Investment Enquiry Service
Tay House
300 Bath Street
Glasgow
G2 4DX.
www.uktradeinvest.gov.uk
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All it takes is one bad apple
to ruin your business.
Around 80% of all daily business to business
transactions are on credit terms. Most of the time
transactions run smoothly and a healthy cash flow is
maintained. But sometimes things go wrong.
At Euler Hermes UK it’s our job to help you use and
manage credit to your maximum advantage.
Call us on 0800 056 5452.
www.eulerhermes.com/uk
Euler Hermes UK plc is authorised and regulated
by the Financial Services Authority.
Registered Office: 1 Canada Square, London, E14 5DX
Registered in England and Wales No. 149786.
The British Exporters Association
Broadway House
Tothill Street
London SW1H 9NQ
Tel: 020 7222 5419
Fax: 020 7799 2468
Email: bexamail@aol.com
www.bexa.co.uk