Text 6 The short-term Guarantee

NCMUK (formerly ECGD’s Insurance Services division) deals with the provision of credit insurance for short-term credit business.

A credit insurance policy for export trade on short-term credit (up to 180 days) or on cash terms is known as a short-term guarantee.

Exporters can choose to obtain credit insurance:

1. for all their export business on a regular basis;

2. for selected bits of their export business;

3. for occasional, high-value export sales.

The risks covered by the short-term guarantee are non-payment by an overseas customer under any of the following circumstances:

(a) insolvency of the buyer;

(b) the buyer's failure to pay within six months of the due date, in cases where the buyer has accepted the goods sent to him by the exporter;

(c) the buyer's failure to accept the goods sent to him (provided non-acceptance of the goods has not been caused or excused by the exporter's own actions, and ECGD decides it would serve no useful purpose for the exporter to take up or pursue legal proceedings against the buyer);

(d) a general moratorium on debts to overseas suppliers which might be decreed by the government of the buyer's country;

(e) any other action by the government of the buyer's country which prevents performance of the contract;

(f) political events, economic difficulties, legislative measures or administrative measures arising outside the UK which prevent or delay payments under the contract;

(g) a 'shortfall' in revenue to the exporter caused by foreign exchange losses when the exporter has to accept payment in a local currency for a debt which should be paid in sterling;

(h) war, and similar disturbances outside the UK, which prevent performance of the contract;

(i) the cancellation or non-renewal of the UK export licence or a prohibition by law on the export of goods from the UK. (This risk, however, is only covered for insurance policies with a pre-credit risk section);

(j) in the case of 'public buyers' in the overseas country (ie. 'government' departments), the short-term guarantee also covers the risk of failure or refusal of the buyer to perform the contract, through no fault of the exporter.

These risks fall into two broad categories:

(a) the creditworthiness of the foreign buyer (buyer risks); and

(b) economic and political risks in the overseas country (country risks).

Text 7 Insurance for Overseas Investments

ECGD also offers insurance to UK companies which invest new equity capital or new long-term loans in overseas investments. The investment must be new, and insurance cover is only available.

The UK investor is insured against the risks of:

(a) expropriation: this covers not only direct nationalisation or confiscation, but also indirect forms of expropriation brought about by the foreign government with the intention of discriminating against the investor or the overseas enterprise in which the investment has been made;

(b) war: this covers loss arising from war, revolution or insurrection;

(c) restrictions on remittances: this covers loss due to the investor's inability to convert earnings into sterling or to repatriate capital or, in the case of loans, to convert repayments of principal and interest;

(d) other risks: ECGD might agree to provide cover for additional political risks, by individual negotiation.

ECGD will decide each application for insurance cover on its merits. Cover will normally extend for a 15 year period, for 90% of any loss arising, subject to a maximum insured amount.

Conclusion

The services offered by ECGD and export credit insurers to UK exporters provide certain clear benefits.

(a) Private sector insurers offer insurance against non-payment of short- term debts by overseas customers. In the event of non-payment they offer advice and help to exporters in recovering debts.

(b) ECGD offers various forms of insurance and bond support for large export contracts.

(c) ECGD offers insurance for new investments overseas.

(d) ECGD bank guarantees encourage banks to provide finance to exporters (or export customers) to stimulate trade at preferential rates of interest.

(e) ECGD offers protection to exporters against foreign exchange rate fluctuations for the period between tendering for a contract and signing the contract.

These benefits all contribute towards encouraging UK export trade by reducing risks and stimulating the provision of finance.