Types of Export Credit Insurance Against Risks

The degree of protection offered by credit insurers, i.e. the amount of reimbursement, depends on the nature of the risks themselves. Credit risks may be
classified as follows:
Political and economic risks:

• War, hostilities, civil insurrections, rebellion, strikes or other disturbances outside the exporter’s country;

• Risks arising from economic events (including shortage of foreign exchange or other restrictions imposed by the buyer’s government) that prevent the transfer of payments or the importation of the goods into the country;

• Boycotts which effectively prevent or restrict the importation of goods into the buyer’s country;
• Natural disasters.

Commercial risks:
• Insolvency resulting in: sequestration, liquidation, judicial management;

• Protracted default: failure of the buyer to pay an undisputed debt within a fixed period (usually six months) from the due date;

• Repudiation: refusal of the buyer to take delivery of the goods without any apparent valid reason.

Various types of export credit insurance are available to meet the exporter’s needs for risk coverage. The main categories are:

- Short-term export credit insurance relating to credits not exceeding 180 days: it is mostly employed when exports are conducted on a cash or letter of credit basis.

Insurance of this type (turnover or global policy) generally covers the firm’s entire turnover and it is issued within an agreed upper limit when the exporter has a large number of export operations. Pre-shipment and post-shipment policies are available: pre-shipment insurance grants protection from the date of validity of the contract until shipment; post-shipment insurance grants protection from the date of shipment until the goods have reached the buyer and payment has been received.

- Medium- and long-term export credit insurance: it is issued for credits extending for periods up to five years (medium-term) or longer (long-term). It provides cover for financing exports of capital goods and services or construction costs in foreign countries.

- External trade insurance: it applies to goods not shipped from the originating country and it is not available in many developing countries. The external trade insurance covers the same risks covered by the short-term export credit insurance policy, with the exception of political risks.

- Foreign exchange risk insurance: it covers losses from fluctuations in the relative exchange rates of the importer’ and the exporter’s national currencies over a defined period running from the date the exporter quotes a definite price.

- Transfer risk insurance: it covers from the risk that the buyer will not be able to convert local currency into foreign exchange and therefore will be unable to effect the payment. Transfer risk, also known as conversion risk, can arise from exchange restrictions imposed by the government in the buyer’s country.