Insurance Advisory Newsletter – Export Credit Insurance Policy : July 2024
What is an Export Credit Insurance Policy?
The risk exposure involved in foreign trade is highly diverse and unpredictable. Businesses engaged in export trade are often at risk of export proceeds not being realized due to commercial or political risk factors. The commonality between foreign and domestic trade is the aspect of credit being extended to customers, and the exposure to risk of non-payment. While we have covered the concept, coverages, and exclusions of Trade Credit Insurance Policy, there exists a separate insurance product to address risks attributable to export trade credit, i.e., Export Credit Insurance (“ECI”).
While Trade Credit Insurance may also cover export trade, ECI is intended solely to protect exporters from instances of overseas buyers defaulting on payments for goods and services supplied by such exporters. In India, standalone ECI products are primarily provided by the Export Credit Guarantee Corporation (“ECGC”), which was established as a Government of India undertaking in 1957.
Need for ECI
Even in the best possible circumstances, payments for exports are subject to risks and non-payment. Today’s risks have grown significantly due to political and economic changes taking place throughout the world. For instance, a war, uprising, coup, or other outbreak could prevent or postpone payment for exported goods; or a nation may impose limits on the import of specific goods or the transfer of payments for imported goods due to economic challenges or balance of payments issues. The business risk of buyer default or bankruptcy/ insolvency on account of political and economic factors is a major reason in support of availing ECI. ECI safeguards exporters from the financial consequences of commercial and political payment risks, providing them peace of mind while focusing on business expansion.
ECGC – Diversified ECI products
Being a government-backed organization, the ECGC not only offers diverse and dynamic products for businesses engaged in export trade but also helps exporters by: (i) Providing guidance regarding international trade, (ii) Risk classification of different countries based upon multiple benchmarks, (iii) Facilitating procurement of export finance from banks/financial institutions, (iv) Assisting in recovery of bad debts, (v) Provides information on creditworthiness of overseas buyers.
How ECI compares to Trade Credit Insurance Policy
While ECI and Trade Credit Insurance offer similar coverages such as protracted default/ delayed payments, insolvency and political risks, no-claim bonuses, etc., ECGC provides benefits over and above the Trade Credit Insurance provided by private insurers as follows:
| Trade Credit Insurance | ECI |
| Standard Whole-Turnover Based products only. | Various products for exporters such as Small Exporters Policy (SEP), Shipment Comprehensive Risk Policy (SCR), Multi-Buyer Exposure Policy (MBEP), Customer Specific Cover (CSC).
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| Excludes any shipments backed by Letters of Credit (“LC”). | Coverage is provided for the failure of the bank, which issued LC, to make payment of the same. |
| Private insurers charge higher premiums since the scope of coverage is very broad. | Lower premiums on account of diversified products, which are based upon transaction-specific needs of exporters. |
Key Takeaways
ECI policy offers an all-inclusive coverage framework, providing protection against both political as well as commercial risks. This strengthens the resilience of companies involved in international trade.
Additionally, the ECGC has notified that it shall provide an additional coverage of 5% to exporters who have reached out directly to the ECGC and not through brokers.
Through specific products under the ECI policy, smaller businesses can avoid investing in a comprehensive policy with huge premiums and instead choose a specific and tailored product which is in their beneficial interest covering all the aspects of risks.
