Improving the Role of Eximbanks/ECAs in the OIC Member States
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Domestic credit insurance covers non-payment on sales within a country. In domestic cover, only
commercial risks are involved; in export credit cover, both political and commercial risks are
covered.
Traditionally, these risks were divided into two categories, namely commercial risks and political
risks. Political risks are the risk of non-payment on an export contract or project due to action by
an importer’s host government. Such action may include intervention to prevent the transfer of
payments, cancellation of a license or acts of war or civil war. Commercial risks arise primarily as
a result of non-payment by a private buyer, commercial bank or a public buyer, due to default,
insolvency or bankruptcy or failure or unwillingness to take delivery of the goods (i.e.
repudiation).
The basic insurance will apply to risks which can arise after shipment/delivery of the goods and
services but can also apply to risks which can arise in the period between signing of contracts
and shipment/delivery; these risks are normally called pre-credit risks. Sometimes separate
insurance policies are issued for the two periods and almost always separate premiums are
charged for the two periods.
The traditional credit insurance product has been a framework or umbrella policy which will
embrace all or an agreed part of the exports of the insured party over an agreed period
(normally one year), referred to as a Whole Turnover policy. Individual transactions are handled
under separate credit limits on individual buyers which can either be set by the insurer or
agreed by policyholders under arrangements for discretion given by the insurer. The insurance
can be provided to the exporter/supplier and can be a useful security for companies seeking
finance from their banks.
A rejection of a credit limit on a foreign buyer by an ECA is one of the best services an export
credit insurer can offer an exporting company, who will typically be carrying 10% of the risk
under the insurance policy, which may amount to the profit on the transaction. ECAs understand
the particular payment risks associated with export sales and can help exporters avoid costly
mistakes.
There are two main kinds of medium- and long-term credit insurance in relation to exports.
Supplier credit refers to cases where the length and terms of credit are set out in the exporter’s
contract (e.g. payment will normally be made by means of Bills of Exchange or Promissory Notes
over five years from delivery/completion). However, the most common form of medium- and
long-term credit in use today is buyer credit, in which insurance is provided to the bank against
non-payment of the export finance loan issued to an overseas buyer.
Investment Insurance
Unrelated to trade transactions, investment insurance is also provided by many ECAs and
traditionally has covered only political risks arising from equity investments as well as loans in
support of overseas projects. Since commercial risks have not been covered, some refer to
investment insurance as political risk insurance. The insurance covers the three standard risks –
expropriation & nationalization, war & insurrection and transfer & inconvertibility.
Increasingly, investment insurance is used to cover risks beyond the original three risks referred
to above. In particular, cover is provided against the risk of host Governments violating
undertakings of various kinds with respect to projects as well as other political events which
could lead to non-payment of an insured project loan.