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The cost of uncertainty: Ex-Im Bank and why political and trade credit risks need reliable, flexible solutions

political and trade credit risks need reliable, flexible solutions

By

, Global Head of Risk, Political Risk Credit and Bond Insurance

Whether sourcing materials or selling goods and services across borders, few companies today are not involved in global trade and investment in some form.

In addition to the risk of non-payment faced when selling to domestic customers, doing business with foreign counterparties or investing abroad exposes organizations to various additional risks, such as nonpayment caused by political perils and other hazards such as expropriation, nationalization or currency inconvertibility.

Traditionally, protection for international trading risks was available predominantly from government owned or sponsored export credit agencies, such as the Export-Import Bank of the United States. Now, however, a robust private market for both political risk and trade credit insurance provides a viable alternative.

Nonpayment protection enables businesses to grow internationally by entering new markets with confidence that they can build revenue there, extend credit terms to their foreign customers and obtain financing on their increased accounts receivable assets.

Unfortunately for U.S. companies using Ex-Im Bank, the federal agency has been unable to write new business since July 1 because its authorization from Congress lapsed. Ex-Im Bank, like many such agencies, requires periodic reauthorization to continue operating and it’s not clear whether Congress will pass reauthorization legislation in 2015. That uncertainty is a problem for businesses that have relied on Ex-Im Bank for trade credit protection.

The private market, however, faces no such constraints. Independently financed and with strong credit ratings, private insurers such as the XL Catlin insurance companies* (rated A+/Stable by S&P) do not require authorization from the federal government. In addition, the private market provides a range of insurance products that can support transactions. Ex-Im Bank has traditionally supported transactions with insurance and guarantees, including pre-export working capital, large aircraft financing and project financing. The private market also offers other forms of protection that Ex-Im Bank cannot provide for risks that businesses may face internationally, such as nonpayment coverage for trade flows involving non-U.S. goods and services. Private nonpayment insurance, also known as trade credit insurance, is comprehensive and protects policyholders against nonpayment for any reason.

For example, the XL Catlin insurance companies have written a whole-turnover trade receivables insurance program for a midsize U.S. chemical company. The program covered more than $270 million in sales volume and supported not only the company’s export sales to markets in Europe, Latin America and the Middle East but also the company’s portfolio of domestic buyers. Ex-Im Bank only provides coverage for a policyholder’s foreign buyers, not the policyholder’s domestic customers.

In another instance, the XL Catlin insurance companies have provided insurance for a leading international bank to facilitate financing of an accounts receivable purchase program. This program supported U.S. exports by a major automobile manufacturer to a customer in Saudi Arabia. Crucially for the supplier and the insured, eligibility of the receivables for coverage is not constrained by the geographic origin of the goods being produced and sold. By contrast, Ex-Im Bank can only support transactions of this type where 50% or more of the products for sale originate in the United States.

 

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Private insurers are able to structure coverage programs for a wide variety of international scenarios

 

Another differentiator is that the XL Catlin insurance companies and other private insurers can provide companies with coverage for purely political risks faced in the countries where they have operations, e.g. manufacturing, sales offices and distribution centers. Such policies can cover multiple as well as single countries, and perils typically include expropriation, war, riots, strikes, terrorism, business interruption and local currency convertibility/transferability risks.

Features

Ex-Im Bank

Private market

Offers short, medium and long term coverage

Has flexible coverage structures

Appetite for wide set of diverse risks

Broad set of insurance products

Can structure programs in days

Independent; does not depend on Congress for reauthorization

Coverage for domestic risks

Limited exclusions, e.g. no requirement for domestic origin of goods

One of the biggest differences between the private market for political risk and trade credit insurance and export credit agencies such as Ex-Im Bank is flexibility. Private insurers are able to structure coverage programs for a wide variety of international scenarios vs. a rigid list of eligible risks. Coverages themselves can be underwritten more flexibly and quickly than export credit agencies typically can. It could take weeks or months to secure protection from government agencies. The private market can offer coverage in a matter of days. Documentation and other strict requirements are necessary to obtain coverage from Ex-Im Bank and others, but those generally are not required from the private market.

Although Ex-Im and ECAs are able to draw on government resources, the private sector can provide substantial capacity sufficient to fully support all but the largest projects. On a per risk basis, private political risk and trade credit insurers (including the Lloyd’s market) have the following total capacity per risk or transaction:

  1. Nonpayment (private-sector borrowers) -- $1.794 billion
  2. Nonpayment (public-sector borrowers) -- $2.196 billion
  3. Political Risks (expropriation, political violence, currency transfer restriction) -- $2.226 billion

XL Catlin’s insurance companies, as one of the largest industry players, can individually offer substantial capacity:

  1. Nonpayment, whole-turnover -- $50 million per buyer; $200 million per policy, to 2 years
  2. Nonpayment, single buyer (private sector) -- $115 million per risk, to 8 years
  3. Nonpayment, single buyer (public sector) -- $165 million per risk, to 12 years
  4. Political Risks -- $190 million to 10 years

Even though Congress may reauthorize Ex-Im Bank eventually, businesses that need trade credit protection should consider using private market political risk and trade credit insurance as a risk management tool to reduce their dependence on, supplement or even replace government programs, much like many companies did in the wake of Congress’s delayed reauthorization of the Terrorism Risk Insurance Act.

About the Authors

Rafael Docavo-Malvezzi is XL Catlin’s Global Risk Manager for political risk and trade credit insurance. Jeffrey Abramson is Global Head of Supplier Trade Credit for XL Catlin. Stuart Barrowcliff is Senior Underwriter of XL Catlin’s Political Risk team in New York. 
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The information contained herein is intended for informational purposes only. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details.

XL Catlin is the global brand used by XL Group Ltd’s insurance subsidiaries.
* In the US, the insurance companies of XL Group  Ltd are: Catlin Indemnity Company, Catlin Insurance Company, Inc., Catlin Specialty Insurance Company, Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., XL Insurance Company of New York, Inc., and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. Information and ratings accurate as of October 2015.

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