Improving the Role of Eximbanks/ECAs in the OIC Member States
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Transfer cover Insurance written to cover the risk (called transfer risk) that a buyer may make a
deposit of local currency to pay for an international transaction but find itself
unable to convert the local currency into foreign exchange for transfer to the
exporter. A claim issued under such cover is called a transfer claim. Such
inconvertibility can happen even where letters of credit exist. The risk normally
arises from restrictions imposed by host governments, through laws or through
regulations that have the force of law. During the last 20 years, transfer risk has
been the most important political risk covered by export credit agencies. This
risk is also covered under investment insurance, where investors are unable to
convert and transfer profits and dividends. Export credit agencies often stipulate
shortfall undertakings in transfer situations, to protect against the possibility
that, even if transfer is possible, devaluation may have rendered the local
currency deposit insufficient to purchase the foreign exchange necessary to
effect the full transfer. Transfer risk is more complicated when a currency
collapses, so that even though foreign exchange may still be available to
purchase, its price will have risen sharply in local currency terms since the
insured contract was signed (or the insured investment made). These events are
probably best looked at case by case, but what in the past have been transfer
claims may in future be default claims, where importers simply do not have
sufficient local currency to purchase the requisite foreign exchange.
Unfair calling The calling of a bond or other instrument, often for political reasons, rather than
because of contractual default by the exporter. This can arise in the context of
bid bonds (also called tender bonds), advance payment bonds, performance
bonds, or retention bonds. Export credit agencies often cover this risk. This
cover can be given either to the exporter or to the bank issuing the bond. See
also demand bond.
Whole turnover
policy
A short-term insurance policy that covers all of an exporter's export business.
This is now rather an old-fashioned concept: few export credit agencies now
insist that exporters insure all their export business, partly because of
competition from other insurers and partly because of the risk of self-insurance.
Most export credit agencies will, however, seek to spread their risk and to avoid
selection against them by exporters (i.e., the possibility that exporters will insure
only the very worst risks). As a general rule, the better and wider the spread of
risk, the lower will be the premium rate charged by the export credit agency and
the more flexible the underwriting. See also comprehensive facility.
Working capital The financing required by an exporter to start or continue to operate and to
produce goods and services to be exported. Normally, export credit agencies are
not directly involved in providing working capital. But many exporters offer
export credit agency cover (including cover of pre-credit risk) to their banks as
security for finance, including working capital. (They often accomplish this
through assignment or hypothecation of the insurance policy to the bank.) A few
export credit agencies are directly involved in the provision of working capital,
offering either facilities or guarantees directly to banks. However, this is a
difficult and high-risk area, especially if the exporter fails to perform its
contractual duties and as a result is not paid by the importer. The export credit
agency is then faced with the (usually politically sensitive) job of trying to
recover from the exporter the money it has paid to the bank under its working
capital facilities.