Text 5 Export Credit Insurance

The Export Credits Guarantee Department (or ECGD as it prefers to be called) is a department of the government which until 1991 assisted exporters in three ways.

(a) It sold 'credit insurance' to exporters, to protect them from the risk of non-payment by an overseas buyer. This side of ECGD's activities was operated as a separate division called Insurance Services. On 1 December 1991, this division was sold by the UK government to a Dutch company, Nederlandsche Credietverzekering Maatschappij (NCM) which plans to run the business as an independent autonomous UK company, NCM UK, benefiting from NCM's complementary experience as a trade insurer (one of the world's largest). ECGD therefore no longer offers UK companies short-term credit insurance. The UK government has said that it will now act as insurer of last resort for short-term political risk. NCM UK will routinely provide insurance against political risk, just as ECGD did, but as a commercial concern may decline to underwrite particularly risky contracts which ECGD would probably have considered for political reasons. ECGD Insurance Services has been a profitable operation overall and there is therefore reason to hope that NCM UK will still provide most of the services which UK exporters have been used to from ECGD.

(b) ECGD continues to provide guarantees to banks on behalf of exporters, so that banks will be prepared to lend money either to the exporter or the exporter's overseas customer. In an indirect way, the ECGD can therefore provide funds (bank loans) to exporters, to help them finance their overseas trade.

(c) It also continues to provide guarantees to banks that provide bonds on behalf of exporters, so as to give the banks some security in the event of a claim for payment by an overseas buyer under the terms of the bond.

Export credit insurance is insurance against the risk of non-payment by foreign customers for export debts.

Not all exporters take out export credit insurance because premiums are very high and the benefits are sometimes not fully appreciated; but, if they do, they will obtain an insurance policy from a private insurance company that deals in export credit insurance.

Although a few private sector companies in the UK (such as Trade Indemnity) offer export credit insurance, the bulk of export credit insurance has until now been provided by ECGD and so NCM UK can be expected to have the lion's share of the market in the short term.

You might be wondering why export credit insurance should be necessary, when exporters can pursue non-paying customers through the courts in order to obtain payment. The answer is that:

(a) if a credit customer defaults on payment, the task of pursuing the case through the courts will be lengthy, and it might be a long time before payment is eventually obtained;

(b) there are various reasons why non-payment might happen. Export credit insurance provides insurance against non-payment for a variety of risks in addition to the buyer's failure to pay on time. The types of risk covered are described later.

Export credit insurance is not essential when exporters are reasonably confident that all their customers are trustworthy. You should, of course, distinguish between export credit insurance, which is insurance against the risk of non-payment by customers for goods exported and sold abroad on credit, and the insurance of the ‘physical’ goods themselves in transit between exporter and customer, i.e. insurance against loss or damage of the goods.