5 Feb 2016
Export Credit Insurance
- Export risks
Risk Reasons 1 Payment methods biased in favour of the buyer With the rise of global supply chains, buyers are in an advantageous position. Big buyers such as retail chain stores in Europe and the US all require payment on credit basis. 2 Impact of non-payment magnified by narrowing profit margins With narrowing profit margins, the loss incurred in any non-payment from buyers can only be covered by much larger orders. For example, to cover the loss of an order worth $10,000, an exporter will have to find a replacement order of $100,000 if the profit margin is 10%, and $200,000 if the profit margin is 5%. 3 Large organisations not necessarily trustworthy Even multinational corporations may have accounting scandals, as seen in the cases of Enron and Worldcom. The uncertainty in evaluating intangible assets has led to volatility in credit ratings. Companies in some countries in Europe and the Americas can file for bankruptcy protection, putting an automatic stay on debt collection efforts.
- Balancing the risks: Transfer and manage one’s risks by taking out export credit insurance
- Strengths of Hong Kong in export credit insurance
- Abundant experience in foreign trade
- International trade connections
- Wealth of information
- Sound financial system
- Accounting and legal systems compatible with international standards
- Mature and efficient credit insurance market and mechanism
- Export credit insurance services in Hong Kong
- Hong Kong Export Credit Insurance Corporation
- Background: established in 1966 and wholly-owned by Hong Kong Special Administrative Region Government
- Scope of services: provides the following services to companies incorporated in Hong Kong in extending credit to overseas buyers:
Scope of services Main services 1 Export credit insurance • A full range of insurance products for credit periods of up to 180 days
• Export credit risks for capital products
• Insurance policies tailor-made for the client’s needs
2 Credit management services • Regular monitoring of the payment ability of insured buyers
• Appraisal and adjustment of the credit limit of buyers
3 Dealing with payment difficulties • Assistance to clients in recovering outstanding payments from buyers 4 Export financing • Policies issued by the Hong Kong Export Credit Insurance Corporation can be used as collateral for discounting export bills by banks in Hong Kong
• Policy holders can assign ECIC policies to banks by authorising the latter as beneficiary of claims
- Underwriting of risks: Where clients fail to collect payments for the reasons set out below, the percentage of indemnity may be as high as 90% of the insured amount
Risk Principles of compensation 1 Buyer risk Buyer is unable to pay its debt or goes bankrupt; buyer is unable to make payment on time or breaches contract 2 Country risk Foreign exchange ban/hurdles, cancellation of import licence, import ban on certain products, delay in repayment of foreign debt, war, revolution, insurrection, and natural disaster
- Setting of insurance premiums: The following factors are considered in setting premiums commensurate with the risks covered:
- Quality of the buyer
- Distribution of risks
- Total value of the exported products
- Country/region of the buyer
- Length of credit period
- Tel: (852) 2732 9988
- The world’s three biggest export credit insurance organisations all have offices in Hong Kong:
- Hong Kong Export Credit Insurance Corporation
HKTDC Tips (on export credit insurance)
To prevent buyer credit problems, exporters should pay attention to the following matters:
- Watch for any changes in the credit insurance cover of the buyer as monitored by the ECIC.
- Make a forecast of whether the buyer will make payment in the coming six to nine months. The exporter can conduct an analysis on the basis of the buyer’s financial status, such as the company’s business records, profit/loss situation, payment records, etc.
- Pay attention to the financial information submitted by the buyer to the industry/commerce registration authorities in its region, such as balance sheets, etc. Pay particular attention where the buyer is habitually late in submitting audited financial reports.
- Watch for any changes in the management and the financial partners of the buyer. Frequent changes in the management of a company, its banks or its auditors may indicate important changes in its internal operation.
- Monitor changes in the product and market. The buyer’s ability to pay will be affected by the marketability of the product in the market.
- Keep in contact and share experience with people in the trade. Look out for changes in the external economic factors as well as consumer sentiment in the importing country.