Export Credit Insurance: Is It Essential?

As a result of campaigning by anti-corruption teams, attention has freshly focused on the Export Guarantee Agencies of a number of Western countries. These agencies endow with taxpayer backed insurance for domestic companies undertaking business in lofty peril areas abroad. In the total indenture fee insured hidden bribes or semi legal fees and commission are enclosed. Export credit insurance is an insurance policy and a peril management product proffered by private insurance companies and governmental export credit agencies to business entities wishing to protect their balance sheet asset, accounts receivable, from loss due to credit risks such as protracted default, insolvency, bankruptcy, etc.

The unconcealed contradictions of the British official attitude to bribery overseas have been pointed out by the Corner house group. They have analyzed two suspect cases in detail in their current report. They abridge allegations of bribery and financial misconduct surrounding two proposed hydropower schemes in East Africa. The insurance product, usually referred to as credit insurance, is a kind of property & casualty insurance and should not be perplexed with such products as credit life or credit disability insurance, which the insured attains to protect against the risk of loss of income needed to pay debts.

Export Credit Insurance can include a component of political risk insurance which is offered by the same insurers to cover the risk of non-payment by foreign buyers due to money issues, political unrest, expropriation, and others.
This point to the major role export credit insurance plays in facilitating international trade. This is offered by vendors to their customers as an alternative to deposit or cash on delivery terms, providing time for the customer to engender income from sales to pay for the product or service. This requires the vendor to presume non-payment risk. In a local or domestic state as well as in an export transaction, the peril increases when laws, customs communications and customer's reputation are not fully unstated. In addition to augmented risk of non-payment, international trade presents the dilemma of the time between product consignment, and its accessibility for sale.

The account receivable is like a loan and represents capital invested, and frequently borrowed, by the vendor, but this is not a safe asset until it is paid. If the customer's debt is credit insured the large, perilous asset becomes more secure, like an insured building. This benefit may then be viewed as collateral by lending institutions, and a loan based upon it used to settle the expenses of the transaction, and to construct more products. Trade credit insurance is, consequently, a trade finance tool. Export credit insurance was born at the end of nineteenth century, but it was typically developed in Western Europe between the first and Second World Wars.

Quite a few companies were founded in every country; some of them also managed the political hazard to export on behalf of their state. Export credit insurance is frequently most known for protecting foreign or export accounts receivable, there has always been a huge segment of the market that uses Trade Credit Insurance for domestic accounts receivable protection as well. Domestic trade credit insurance provides firms with the protection they need as their customer base consolidates creating larger receivables to smaller number of customers. This creates a larger publicity and greater menace if a customer does not pay their accounts.

The addition of new insurers in this pace has augmented the accessibility of domestic cover for companies. Many businesses found that their insurers withdrew export credit insurance during the financial crisis of 2007-2010, foreseeing huge losses if they continued to underwrite sales to failing businesses. This led to accusations that the insurers were deepening and prolonging the slump, as businesses could not manage to pay for the risk of making sales without the insurance, and therefore contracted in bulk or had to close. Insurers countered these criticisms by claiming that they were not the source of the crisis, but were responding to economic realism.

In the UK, the Government set up a 5 billion emergency fund for trade credit top-up. On the other hand, this was considered a failure as the take-up was very low. The UK ECGD provided financial backing for Knight Piesold preliminary consultancy role in the proposed Ewaso Ngiro (South) hydropower scheme in Kenya, and was allowing for support for the proposed Bujagali Dam in Uganda. It is not contained by the remit of this report to confirm the allegations, that role rests in a court of law. Export credit insurance is believed that there is sufficient reason to warrant further investigations into the possibility of financial mismanagement in several aspects of the contract allocation.

In the year 1992 a World Bank study team reported that initial feasibility studies by Knight Piesold were five times what such services would normally cost. They report that at least 15.3m had been paid up front to Knight Piesold even though the scheme was not due to come on stream for another 10 years onwards. Perceptions that countries are not living up to their obligations under the Conventions will predictability weaken the agreement, and lead to wearing a way of public confidence. Many buy export credit insurance to offset risk, including nonpayment. Similar to international credit rating companies that analyze the risk of doing business with different countries
On a broader agenda more study needs to be done in the way defense contracts involving far-off countries are awarded. The US, Germany, and Britain are among the biggest arms sellers in the world. They are tremendously competitive. As these contracts typically involve an element of national government involvement are even more enigmatic than normal contracts. Yet the proof we have indicates that there are still extreme commissions paid in these deals. Export credit insurance proved to be a valuable investment because the company was able to receive compensation. The whole process of the scheme took no more than three months.

Although the company has purchased export credit insurance for a few orders, so far none of its clients has defaulted on their payments. The growing number of nonpayment cases, which came first as a result of the global economic slump, and now due to the ongoing money owing crisis in the EU, is encouraging more suppliers to apply for export credit insurance. This is mainly true for those offering high-value products. It is always good to know that you are acquiring the insurance credit in order for you not to feel regrets in the end. So, you have to choose the right insurance for you carefully.