Export credit risk insurance safeguards an exporter against the risk of non-payment by an international buyer. In other words, export credit risk insurance reduces the payment risks associated with international trade by providing the exporter with conditional assurance that payment would be made in case the foreign buyer does not pay.
Through credit risk insurance, exporters are able to protect their overseas receivables against a number of commercial risks, such as buyer insolvency, bankruptcy, or extended defaults along with certain political risks like war, terrorism, riots, etc.
Table of Content
- 1 Marine Insurance Premium and Documents
- 2 Characteristics of Export Credit Insurance
- 3 Types of Policies
- 4 Export Credit Guarantee Corporation (ECGC)
- 5 Notable Records of ECGC
- 6 ECGC signs Memorandum of Understanding with the Export Credit Insurance Agencies (ECA)
- 7 Maximum Liability
- 8 Credit Limit on Overseas Buyers
- 9 Restricted Cover Countries
- 10 Premium Rates
- 11 Time Limit and Settlement of Claims
- 12 Special Schemes
- 13 Other Special Policies by ECGC
This insurance also covers currency inconvertibility, expropriation, and changes in import/export regulations and policies. Export credit insurance is offered on either a single-buyer basis or a portfolio multi-buyer basis for short-term/medium-term periods. A single-buyer basis policy is a credit insurance solution aimed at covering the risk of non-payment on transactions done with one buyer on a revolving basis. On the other hand, a multi-buyer basis policy is one that covers the risks on all buyers of an exporter.
The main features of export credit insurance are as follows:
- It allows exporters to minimise the risk of non-payment by foreign buyers.
- It enables exporters to increase export sales, establish market share in emerging and developing countries, and compete more vigorously in the global market due to reduced non-payment risks.
- It encourages money lenders (banks, financial institutions) to increase the exporter’s credit capacity and offer customised financing terms.
The main advantages of export credit risk insurance are that it reduces the risk of non-payment by foreign buyers and offers open account terms in the global market. However, the main disadvantages of export credit risk insurance are that the insured needs to bear the cost of maintaining the policy and risk is shared in the form of deductible. Also, the coverage is generally below 100 per cent.
Characteristics of Export Credit Insurance
Applicability
Recommended for use in conjunction with open account terms and export working capital financing. The export insurance policy is applicable on exporters that sell goods to international buyers for terms up to 180 days (exceptionally up to 360 days for bulk agricultural products and capital goods).
Risk
Risk of the uncovered portion of the loss shared by exporters and their claims may be denied in case of non-compliance with requirements specified in the policy. The single-user policy provides up to 95 per cent coverage against commercial and political risks for consumer goods, materials, and services up to 180 days; and small capital goods, consumer durables, and bulk commodities up to 360 days. The multi-user policy provides up to 85 per cent coverage and covers large capital equipment up to five years.
Types of Policies
The export credit risk insurance is aimed at covering different types of risks to protect exporters. The policies are designed based on the criteria shown in Figure:
Credit Risks Covered
Credit risks mainly include incidences of non-payment by the international buyer. These risks fall into either of the following categories:
Commercial Risks
These risks include all financial risks assumed by an exporter when he/she extends credit to buyers without any collateral. Some of the commercial risks include the following:
- Insolvency of the buyer
- Protracted default in payment (when the buyer has to pay within four months of the due date)
- The buyer’s failure to accept the goods though there is no fault on the part of exporter
Political Risks
An export credit risk insurance policy includes six types of covers under political risks, which are as follows:
- Imposition of restrictions in the buyer’s country by the government for remittance sale proceeds, which may block or delay the payment to the exporter;
- War, revolution or civil disturbances in the buyer’s country;
- New import restrictions in the buyer’s country or cancellation of the valid import license after the date of shipment or contract, as applicable;
- Cancellation of the valid export license or imposition of new licensing restrictions after the date of contract, applicable under the contracts policy;
- Payment of additional transportation and insurance charges occasioned by interruption or diversion of voyage, which cannot be recovered from the buyer; and
- Any other loss that has occurred in the buyer’s country, which is not covered under general insurance and beyond the control of exporter and/or the buyer
Credit Risks Not Covered
The risks not covered under the export credit risk insurance policy are as follows:
- Commercial disputes including quality disputes raised by the buyer, unless the exporter obtains a decree from a competent court in the importer’s country in his favour;
- Causes inherent in the nature of the goods;
- The buyer’s failure to obtain an import license or exchange authorisation in his country;
- Insolvency or default of an agent of the exporter or collecting banks;
- Losses or damages which can be covered by commercial insurers; and
- Foreign exchange fluctuations
An exporter can acquire a comprehensive policy that covers both commercial and political risks or a policy that covers political risks only. However, it should be noted that there is no such policy that covers only commercial risks.
The export credit risk insurance policies can broadly be classified into global policies and specific policies. Generally, exports with short-term financing are covered under global policies, whereas exports with medium/long term financing are covered under specific policies.
The main types of global and specific policies are as follows:
- Based on the number of buyers
- Multi-buyer policy (multiple purchasers): This policy provides cover for several buyers in different countries and applies to only for short-term operations. The policy maintains that the exporter compromises the total or largest portion of his/her operations with the purpose to mitigate the risk and avoid adverse selection. This implies that the exporter could just simply insure the ‘bad/riskier operations’ with insurance. The policy typically applies to noncapital goods, components, raw materials, spare parts, and most services.
- Single-buyer policy (one purchaser): This policy covers only one export or many exports for a single buyer. The operations could range from short to medium and long-term operations. The policy allows the exporter to decide what exports need to be covered.
- Multi-buyer policy (multiple purchasers): This policy provides cover for several buyers in different countries and applies to only for short-term operations. The policy maintains that the exporter compromises the total or largest portion of his/her operations with the purpose to mitigate the risk and avoid adverse selection. This implies that the exporter could just simply insure the ‘bad/riskier operations’ with insurance. The policy typically applies to noncapital goods, components, raw materials, spare parts, and most services.
- Based on financing to exporters
- Medium/ long-term insurance (one purchaser): This policy covers medium to long-term financing to exporters of capital equipment or related services. This policy encourages exporters to participate actively in the export of mechanical and electronic products. A medium- and long-term export credit insurance policy helps the insured in warding off payment risk through shouldering commercial and political risks as stated in insurance policies.
Export Credit Guarantee Corporation (ECGC)
The need for export promotion in India began immediately after independence in 1947. Therefore, a proposal for initiating an export credit guarantee scheme was put forward to the Export Advisory Council in 1953. The then Finance Minister, Mr. T. T. Krishnamachari, appointed a special committee under the Chairmanship of Mr. T.C. Kapoor to examine the feasibility of setting up an effective organisation for providing insurance against export credit risks.
The Government accepted the recommendations of The Kapoor Committee and the Export Risks Insurance Corporation (ERIC) was established in July 1957. The objective of ERIC was to offer export credit insurance support to Indian exporters. Later in 1983, the corporation’s was renamed as Export Credit Guarantee Corporation of India Limited (ECGC).
ECGC is a government body that provides credit guarantee to exporters for the non-payments by buyers. It works like an insurance provider guaranteeing export payments if the buyer defaults in making payment.
ECGC works under the administrative control of the Ministry of Commerce, Government of India. It is managed by the Board of Directors comprising the representatives of the government, RBI, banking, insurance and export industries. ECGC has its regional offices located at New Delhi, Chennai, Kolkata, Bengaluru and Mumbai. Since its inception, ECGC has introduced several export credit risk insurance programmes for the benefit of exporters in India.
These programmes are available under three heads:
- Export Credit Insurance for Exporter
- Special Schemes
- Export Credit Insurance for Banks
Notable Records of ECGC
Largest Policy – short term: ₹450 crores
Largest database on buyers: ₹8 lakhs
Largest credit limit: ₹80 crores
Largest claim paid: ₹120 crores
Quickest claim paid: 2 days
Highest compensation: Iraq ₹788 crores
In addition, on 31.3.2012 ECGC has achieved the milestone of ₹1000 crores of premium income.
The objective of ECGC is to support exporters by providing them with cost-effective insurance services to meet the needs and expectations of Indian exporters. It provides a range of credit risk insurance cover to exporters against loss incurred in export. The corporation also provides guarantee to banks and financial institutions for enabling exporters to obtain better facilities from them.
Certain services offered by ECGC to Indian exporters are as follows:
- Provides a risk cover to the exporters against political and commercial risks
- Offers exporters information related to creditworthiness of international buyers
- Provides credit ratings for about 180 countries
- Helps exporters in obtaining financial assistance from commercial banks and other financial institutions
- Provides other services, such as consulting, which are not provided by other commercial insurance organisations
- Assists exporters in recovering bad debts
- Helps exporters in developing and diversifying their exports/
In addition, ECGC has now started offering tailor-made products to exporters and bankers in case readymade products do not suit them.
ECGC signs Memorandum of Understanding with the Export Credit Insurance Agencies (ECA)
Export Credit Guarantee Corporation of India Ltd (ECGC) has signed a Memorandum of Understanding (MoU) on Co-operation with the Export Credit Insurance Agencies (ECA) of BRICS countries in Fortaleza, Brazil. The MoU, which was signed in the presence of Heads of Governments from BRICS countries, will strengthen collaboration among BRICS countries ECAs by establishing a framework of co-operation among them to support and encourage international trade between BRICS countries, and wherever appropriate, to facilitate the supply of goods and services from their respective countries as part of a project in any of the BRICS countries.
The co-operation will also help to foster trade support networks and business linkages between India and other BRICS countries, and improve the business environment. It also provides for seeking assistance from each other in recovering the amounts for which claims could have been paid for projects undertaken in any of the BRICS countries.
Maximum Liability
ECGC fixes a maximum liability under each standard policy for export credit risk insurance extended to Indian exporters. The maximum liability is intended to cover all shipments made by the insured exporter during a period of 24 months from the date of issue of the policy. In other words, the maximum liability refers to the limit up to which Export Credit Guarantee Corporation would accept liability for shipments made by the insured exporter in each of the policy years, for both commercial and political risks.
The exporters need to estimate the maximum outstanding payments due from foreign buyers at any time during the policy period and acquire the policy maximum liability for the estimated value. However, for the sake of convenience of exporters, the maximum liability fixed under the policy can be increased subsequently, if necessary.
Credit Limit on Overseas Buyers
Credit is offered by exporters to the buyers as an alternative to the prepayment or cash. The buyers are provided with a time limit to make due payments. However, this requires the exporter to assume non-payment risk. As explained before, exporters acquire the export credit insurance to insure their accounts receivable from loss due to the insolvency on the part of buyers.
The policy holding exporters are expected to apply for a credit limit on each of their overseas buyers to insure the payment for goods sold on credit to every buyer. This credit limit refers to the maximum amount of credit that the insurer would extend for each overseas buyer of the insured exporter in case of non-payment due to commercial or political risks.
The level of credit limit is set at the maximum amount that would be payable by an overseas buyer to the exporter at any time. The exporters are able to trade on an insured basis within the approved credit limit throughout the policy period. If a flexible limit has been agreed by the insurer and the insured with respect to some or all overseas buyers, exposures up to that amount need not be agreed by the insurance company.
They are however, covered based on the payment experience of the exporter. The insurance company may reduce or cancel a credit limit at any point of time in case of negative information with respect to buyer’s credibility or deterioration in payment behaviour. A new limit would then be applicable to all deliveries made by the exporter to his/her overseas buyer after the date of trade.
Restricted Cover Countries
Generally, exporters prefer to trade with countries that have low levels of political instability, conflicts, weak/unbalanced economies, etc. Country risk indicates the risk of carrying out trade with a country and depends on several factors, such as political risk, economic projections, debt indicators, credit ratings, accessibility to bank finance, etc. In order to help international traders in identifying low-risk countries from high-risk countries, governments follow the country risk methodology.
This methodology aims at assessing the country on the prevailing economic and political conditions and the developments that would impact the future. This assessment is based on a period of 12 months and the predictions are based on the economic and political strength and weakness of every country.
The countries are classified into seven risk categories as shown in Figure:
The revised country classification is applicable 01.12.2006 onwards. As per the classification, six of the twelve countries of the Commonwealth of Independent States (CIS) region have been upgraded. The Russian Federation has been placed in Group A2. Kazakhstan and Russia are upgraded from Group B1 to Group A2. Kyrgyzstan, Moldova, Tajikistan, and Turkmenistan have been shifted from high and very high risk group of C2 and D to group C1.
The other six countries are grouped into moderate risk category of B1 and B2. As per the new classification, no CIS country is placed in the high risk groups of C2 and D. Azerbaijan, Belarus, Georgia, Moldova, Kazakhstan, Russian Federation, Ukraine are placed in the open cover category, which would allow policy holders to acquire insurance cover on liberal terms.
The remaining five countries, i.e., Armenia, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan are placed in Restricted Cover (Category I), in which the ECGC cover could be availed on a revolving limits basis, usually valid for a period of one year on the following basis:
- Irrevocable Letters of Credit confirmed by banks listed in the Bankers Almanac or by local banks whose reports are satisfactory cover will be 90%.
- Normal cover of 90% on DP (Documents against Payments)/DA (Documents against Acceptance) terms subject to satisfactory report on the buyer
- None of the CIS countries are placed in Restricted Cover (Category II-where specific approval is given on a case-to-case basis).
The current ECGC Classification for 12 CIS countries is given in Table:
| Open Cover Category | Restricted Cover Category (revolving Limit Basis) |
|---|---|
| Azerbaijan (B1 – 3/7) | Armenia (B2 – 4/7) |
| Belarus (B1 – 3/7) | Kyrgyz Stan (C1 – 5/7) |
| Georgia (B2 – 4/7) | Tajikistan (C1 – 5/7) |
| Kazakhstan (A2 – 2/7) | Turkmenistan (C1 – 5/7) |
| Moldova (C1 – 5/7) | Uzbekistan (B2 – 4/7) |
| Russia (A2 – 2/7) | |
| Ukraine (B2 – 4/7) |
The country risk classification forms the fundamental basis for the purpose of setting minimum premium rates for credit risk extended to exporters trading with buyers in these countries. For example, the premium for a policy granted to an exporter for credit insurance trading with a moderately high risk country like Tajikistan (C1 – 5/7) will be higher as compared to that charged to cover an overseas buyer in Russia (A2 – 2/7) with low risk.
To acquire insurance cover under ECGC programmes, insured is required to pay a certain amount as administrative fees and premiums. Let us discuss these two costs in detail:
Administrative Fees
This is charged on the basis of the order value or the loan amount. An application fee is charged when an application is made by the exporter. For each extension of the cover beyond a year, a prolongation fee is also charged. Moreover, an issuing fee is charged on the issuance of the cover policy.
The premium amount depends mainly on the country risk category into which the buyer’s country is classified. As discussed above, seven country risk categories (1, lowest risk, to 7, highest risk) are used for the calculation of the premium. The premium is also affected by the value of the order, the terms of payment, and buyer’s status (whether public or private exporter).
Premium rates for export credit insurance are affected by payment terms that an exporter extends, the spread of the buyer and country risks, and the exporter’s previous trading experience. It also depends on the level of the uninsured percentage (percentage of cover). The credit standing of the buyer country also influences the premium amount to be paid by the exporter. Apart from this, certain types of securities that enhance the position of the creditor of the covered receivables also affect premium calculation.
Time Limit and Settlement of Claims
The time limit for export credit risk insurance must be specified on the insurance contract agreed between the insurer and insured (unless otherwise specified in the additional Agreement to the Insurance Contract fixing a Credit Limit).
In the event of non-payment of an accounts receivable by an overseas buyer till the payment due date, the exporter is required to take prompt actions to prevent or minimise his/her loss.
A monthly announcement of pending bills (which are not paid for more than 30 days after due date) needs to be submitted to ECGC indicating the action taken by the exporter in each case. Prior approval of ECGC is needed for granting an extension of time for payment to the overseas buyers.
Claims arise when any of the risks insured under the policy emerges. If any overseas buyer becomes insolvent, the exporter is entitled to a claim one month after his/her loss is accepted against the insolvent’s estate or after four months from the due date, whichever is earlier.
The settlement of claims in case a loss occurs follows a set pattern. In case an exporter does not realise his/her debt/outstanding receivable beyond the extension period (exporter has the option to grant extensions to foreign buyers for payment beyond the due date), the insurer must be informed instantly. This information commences the beginning of the waiting period for the extended default. In case the payments are not realised even after the waiting period, the insured claims for the settlement of loss.
The amount of loss incurred is calculated as the amount of all outstanding debts receivable on the export transaction less the following items:
- Uninsured commercial credits and parts thereof
- Commercial credits to be offset
- Returns and proceeds from the retention of the title as well as from other rights and securities
- All payments and proceeds after the occurrence of the event of loss relating to commercial credits
- Any prior payments received on the export transaction
The claims handling process has been summarised in Figure:
As shown in Figure, the exporter has an option to grant an extension to the overseas customer for payment beyond the due date known as the extension period. If the debt was unpaid in full at the extended due date, the insurer should be informed. Beyond this, a waiting period starts for the protracted default. There is a waiting period of fourto nine months from the due date in case of extended default before the claim is settled by the insurer. After the waiting period, insurers activate the collection process.
Special Schemes
For the purpose of extending export credit insurance support to Indian exporters, ECGC has introduced a whole gamut of policies to suit the exporters’ requirements. The insurance policies offered by ECGC can be classified into five groups, which are as follows:
Standard Policy
This policy is ideal for covering risks in respect of goods exported on short-term credit (not exceeding 180 days). The standard policy covers both commercial and political risks starting from the shipment date.
Specific Policy
This policy is designed to protect Indian exporters against payment risks associated with exports on deferred terms of payment, services rendered to overseas buyers and turnkey projects undertaken overseas. These policies are issued independently for each specific contract, and cover risks usually from the contract date.
Financial Guarantees
These are issued to Indian banks for protecting them from risks of payment loss linked with extending financial support at pre-shipment and post-shipment stages. Financial guarantees also cover several other non-fund based facilities extended to exporters.
Export Performance Guarantee
This refers to insurance cover for Indian banks. This cover provides different guarantees on the behalf of exporters in order to facilitate international trade. The guarantee extended by ECGC on behalf of the exporter acts like a counter guarantee to the bank. This is issued to protect the bank against losses that it could incur on account of guarantees given by the bank on behalf of exporters. This encourages banks to give guarantees on a liberal basis for export purposes.
Special Schemes
Export Credit Guarantee Corporation of India offers several special schemes for the benefit of Indian exporters. These schemes have been designed to protect exporters from the forfeits of the payment risks, both political and commercial, and to enable the exporters to increase their overseas business without the fear of loss.
Transfer Guarantee/Joint Venture Insurance
When an Indian bank gives its confirmation to a foreign Letter of Credit (offered as a guarantee of payment), it is bound to acknowledge the drafts drawn by the beneficiary of the Letter of Credit without any recourse to him/her. The drafts should; however, be drawn strictly in conformity with the terms of the Letter of Credit. The authorising Indian bank would incur a loss in case the foreign bank fails to repay it with the amount paid to the exporter. To avoid this situation, ECGC offers a transfer guarantee insurance cover to protect Indian banks against possible losses arising out of non-payment risks.
Overseas Investment Insurance
This policy provides protection to the Indian investments made in other countries. These investments could either be in cash or the form of export of Indian goods and services. The overseas investment insurance cover is generally available for the original investments combined with annual dividends or interest receivable. The policy provides cover against the risks of war, expropriation and restriction on remittances.
Exchange Fluctuation Risk Cover
This policy acts like a shield to protect exporters of Indian goods, civil engineering contractors, and consultants who receive payments over a period of time against their exports, construction works, or services offered abroad. Since the payments received by exporters are denominated in foreign currency, they are exposed to exchange rate fluctuation. The forward exchange market does not provide any cover for deferred payments, which implies that if an exporter has suffered a loss in payment owing to exchange rate fluctuation, it shall not be compensated.
To avoid this situation, ECGC offers an exchange fluctuation risk cover. This cover compensates exporters for non-payment based on a pre-agreed reference currency exchange rate. The cover will be provided initially for a period of 12 months and can be extended if necessary. Usually the existing rate or a rate approximately close to it is set as the reference rate. This reference rate forms the basis of the cover.
There are certain terms of exchange fluctuation risk cover, which are as follows:
- The exchange fluctuation risk cover is available for payments entitled over a period of 12 months extending up to a period of 15 years.
- The exporter makes a bid to the buyer to settle the exchange rate for transactions. In case the exporter wins the bid, he/she is supposed to take the Exchange Fluctuation (Contract) cover for all the payments that will be due for the project. The basis for the exchange fluctuation risk cover is a reference rate agreed upon by the two parties to the contract. This rate could either be the rate prevailing on the date of bid or the rate approximating it.
- In case a bid is not accepted, 75 per cent of the premium paid by the exporter is compensated back.
Product Liability Insurance
Product liability is law by which manufacturers, distributors, suppliers, retailers, etc. responsible for making products available to the public are held guilty for the injuries these products may cause to customers. Product liability insurance covers all sums (inclusive of the legal costs), which the exporter becomes liable to pay as damages arising out of any defect in the product manufactured/sold by an exporter as a result of the following:
- Accidental death/ bodily injury or disease to any third party.
- Accidental damage to property belonging to a third party
There are generally three types of products claims, that an exporter faces, which are as follows:
- Manufacturing or production defects: This claim is made when a part of the production process creates an unsafe defect in the final product.
- Design flaw: This claim is made when the design of the product is fundamentally unsafe.
- Defective warnings or instructions: This claim is made when the product was not properly labelled and did not have sufficient warning instructions for the customers benefit.
Other Special Policies by ECGC
Buyer Credit Cover Policy
Buyer’s credit is extended by a bank in India to an overseas buyer enabling the buyer to pay for machinery and equipment that he may be importing from India for a specific project. This policy is designed to protect lending banks from certain risks of non-payment.
Lines of Credit Cover
A Line of Credit is a credit extended by a bank in India to an overseas bank, institution or government for the purpose of facilitating import of a variety of listed goods from India into the overseas country. A number of importers in the overseas country may be importing the goods under one Line of Credit and this scheme is meant to protect the lending banks from certain risks of non-payment.
Customer Specific Insurance Cover Policy
In order to cater to the specific need of reputed large value exporters which otherwise could not be fully addressed under any one of standard products, the customer specific policies have been introduced and are issued to large exporters on a selective basis on the merits respective requests for such cover.
