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Importance of Credit Insurance and Buyer creditworthiness in International Trade: –

credit insurance companies insure cross-border commerce and investment by defending export markets and banks.

Over the last year and a half, Coronavirus (COVID-19) Pandemic has severely affected the global economy requiring government support and central bank-led liquidity infusion to limit the adverse impact. It has harmed small business on both the production and consumption sides of the market, causing a vicious spiral. Illnesses, quarantines, and a resultant lack of mobility have led to severe deterioration in the credit profile of buyers/customers globally. It always a key anchor to facilitate cross border trade, has become even more critical to ensure sufficient coverage against Buyer Bankruptcy Risk.

Credit insurance or Trade Credit Insurance facilitates cross-border commerce and investment by defending export markets and banks against the possibility of a payment default.

Commercial concerns, such as issues with a buyer’s cash flow, bankruptcy, or other market-based issues, are common causes for default. Political threats in international markets include war, political transformations, and difficulties in exchanging a foreign currency.

In this article, NuPhi focuses on how insurance companies provide protection or cover against Buyer payment risk capital to Exporters. 

Credit Insurance just like any other insurance for an upfront premium insures against a much larger loss event of payment default by buyer. Various factors that determine the premium amount or percentage are Country of Buyer (Developed Countries attract lower risk premium), Credit worthiness of the Buyer – determined by the financial strength of the Buyer, past default history of the Buyer to Financial Institutions or Vendors and underlying product or commodity being traded. 

Important point to note is the risks that are not covered even by Credit Insurance Policies such as Commercial Dispute or Trade Dispute Risk. In case a buyer raises quality or quantity related dispute then a Credit Insurance Policy usually has an exclusion to that and will not cover such a dispute under Insurance. Other risks are loss or damage in transit (transit Risk) which is usually covered under Marine or Voyage Insurance Policy.

Export Credit Guarantee Corporation of India (ECGC):-

The Export Credit Guarantee Corporation of India Limited was founded in 1957 as a division of the Indian government. The primary goal of this Government Institution is to encourage exports from the nation by offering credit risk insurance and other support services. 

It is a vital export corporation that aims to increase the competitiveness of India’s exports around the world. ECGC focuses on a below main issues:

1. It offers direct insurance to Exporter Organisations including SMEs against the possibility of exports payment not being realised.

2. Credit Insurance to Banks and other financial firms with various forms of credit insurance against Export Financing provided to Borrowers.

Private Global Insurers, Local Insurers (COFACE, Euler Hermes, ICICI Lombard, Tata AIG): –

Just like private Insurance companies in Life and Health Insurance Space, even in Credit Insurance Space there are private Insurers who provide Credit Insurance to Exporters. As per IRDA (Insurance Regulatory Development Authority) guidelines, foreign credit Insurance companies are not permitted to directly offer insurance to Indian Companies and hence these Global Insurers have local Insurance Partners such as ICICI Lombard, Tata AIG .  that offer a suitable alternative to ECGC.   

local and global insurers such as (COFACE, ECGC, Euler Hermes, ICICI Lombard, Tata AIG) provide insurance for huge association to protect them from multiple lawsuits. it protects and covers the damage associated by export.
Link: – https://www.insurancejournal.com/app/uploads/2011/04/global-reinsurers.jpg

Final words: –

Despite promising vaccinations globally, the Covid-19 pandemic threatens to cause chaos across industries and countries. Present times have clearly caused a lot more claims across Credit Insurance that have led to increases in premiums and even refusal by a lot of Insurers to provide cover against a certain segment of Buyers that are affected by the pandemic such as Brick and Mortar Retailers 

However, credit insurance is vital to a small corporation’s long-term survival. There is a greater emphasis on trade credit protection for SME Exporters. Factoring is another way in which exporters can protect against Buyer Payment Risk, we cover that under a separate article.

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Anshika Prasad