The Benefits of Export Credit Insurance

Export credit insurance is a trade financial facility that provides an important support to exporters needing financial resources to enlarge their economic potentialities
by insurance coverage from different risks they face in their activity.
Export credit insurance is thus an important instrument for exporters both in developed and indeveloping countries. It provides the following benefits:

1. Exporters can offer their buyers competitive payment terms.

2. They are insured from political and commercial risks.

3. They are protected against financial costs of non-payment.

4. They have freer access to working capital and they are covered against losses from variations in currency exchange rates after non-payment occurs.

5. Their insurance cover reduces their need for tangible security when negotiating credit with their banks.

Exporters are often exposed to credit risks: the buyer may not be able to pay on due date, payments may be suspended for political reasons or recovery of goods may be unfeasible.

Credit insurance provides protection in the form of reimbursement in the event of non-payment. The insurer compensates exporters and their creditors against loss deriving from causes outside their control and from events occurring outside their own country which are not normally insured under other types of policies, such as marine or fire insurance policies.

The insurance cover or the guarantee granted by the insurer enables the exporter to obtain funds from a bank, funds that are often difficult to be obtained without providing securities. Hence, the exporter has better access to working capital and can offer extension to the buyer. Credit insurance benefits the exporter’s financier as well: in case of loan default, a credit insurance policy reduces the dependence on tangible assets.

As an efficient export credit insurance market is essential for exporters, rules and regulations must be set up to avoid unfair competition and decreasing quality of the services offered. The first step towards harmonisation and transparency in official export credit systems was by the EU on 7 May 1998; the Council has then adopted a Directive concerning harmonisation of export credit insurance for transactions with medium and long-term cover. The directive attempts to reduce distortions of competition among enterprises in the Community caused by differences in official export credit systems in Member States.

Before this Directive came into force, the conditions of export credits that benefit from such insurance or guarantees were provided in the OECD Arrangement on Guidelines for Officially Supported Export Credits. It contains limits on the terms and conditions for export credits with a duration of two or more years that are officially supported, i.e. that are insured, guaranteed, refinanced or subsidised by or through ECAs, without covering the conditions of insurance or guarantees. European Union countries were required to bring into force the laws, regulations and administrative provisions necessary to comply with the Directive by 1st of April 1999.

Member States have therefore made some changes in their systems and, where necessary, they have made notifications in accordance with the requirements of the Directive. It is too early to draw any conclusions on the operation as it is too early to assess whether any changes will need to be made to the directive. The Commission is due to submit a report to the Council by 31 December 2001 on the experience gained and the convergence achieved in applying the provisions laid down in the Directive.

The advent of the Euro has had an impact in the field of export credits, particularly where official supported financing is concerned: previously there were Commercial Interest Reference Rates (CIRRs) for most Member States currencies and also for the ECU. CIRRs are the minimum interest rates that can be officially granted by national export credit agencies under the OECD Arrangement on Guidelines for Officially Supported Export Credits.

A single Euro CIRR now prevails for all Member States in the Euro zone instead of the national CIRRs. The Euro CIRR is also used by other participants in the OECD Arrangement whenever financing is named in Euros.