A Reference Guide to Trade Finance Techniques(subject to named exclusions), and
withdrawal of an export licence after the
contract has been agreed.The challenge here is to identify the most
appropriate source of cover. Credit insurance
can be available from both commercial
insurers and the local export credit agency.
The coverage offered by export credit
agencies varies significantly between
countries and is typically subject to strict
limits. Commercial insurers usually have the
flexibility to offer more tailored coverage,
depending on requirements.
Potential problems
There are a number of potential problems
with the insurance of goods in transit.
In the event of the loss of or damage to
a shipment, there may be a dispute over
who is responsible for the goods and the
insurance. This risk can be eliminated
through careful drafting of the policy.
Where an unforeseen circumstance
occurs, the insurance policy may not
cover the consequential loss. For
example, if a consignment of goods is
damaged, the importer may fail to meet
its contracts to supply. The importer’s
customers may then look to competitors to
provide the goods, leading to the loss of a
customer and resultant long-term sales. It
is possible to insure against consequential
loss; however, the insurance company’s
definition is likely to be narrow and may
not cover longer-term reputation loss.
In other cases the insurance company
may argue that a particular circumstance,
e.g. loss caused by terrorism, is excluded
from the coverage offered by the policy,
and may refuse to pay.
Finally, insurance is cheapest for those
events which are least likely to happen,
while it can be expensive to obtain
insurance cover to protect against the
most common causes of loss. In these
circumstances the exporter will need
to decide whether it is appropriate to
continue with the transaction, whether
to charge the importer a higher price
(effectively a risk premium), or whether
to change the way the exporter does
business in order to minimise risk.
As with other documents, care needs to
be taken to ensure appropriate insurance
is arranged for the period of coverage
required. In particular, care should be
taken to ensure each separate shipment
is covered (important in the case of annual
insurance policies), with an appropriate
cover note or certificate in place. This cover
note or certificate should detail the precise
nature of the goods being shipped, the
date and method of shipment, and should
match the descriptions on other associated
documentation.
As with general insurance, there are also
limits to credit insurance.
Coverage under export credit agency
rules may not be available, as its
qualifications can be limiting. For
example, credit insurers (whether export
credit agencies or private insurers) only
provide coverage up to a maximum
proportion of a contract (this may be 90%
of the value of the contract in the case of
counterparty failure, and 80% of the value
of the contract in the case of specified
country risks).
Credit insurance may also be limited to
companies with minimum or maximum
annual turnovers, or to transactions on the
basis of particular payment terms.
Finally, there can be a delay in the
settlement of a credit insurance claim. For
example, credit insurers are unlikely to
settle a claim against a payment default
(rather than documented insolvency) for a
number of months, resulting in cash flow
problems for the seller.Assessment
Insurance can provide a relatively easy
way for both parties to protect against core
losses. Under certain Incoterms, arranging
insurance cover for goods in transit is
compulsory for one party. However, in
general it is up to the individual companies
to decide whether and when it is appropriate
to arrange insurance. Modelling both the
likelihood of an event taking place and the
impact of such an event on the business
as a whole will help the company decide
whether arranging insurance is a cost-
effective solution for each particular risk.