Export credit insurance

Definition

Export credit insurance is a type of insurance that protects exporters against the risk of non-payment by foreign buyers, ensuring that they can safely engage in international trade. This coverage helps mitigate potential financial losses resulting from issues like buyer insolvency or political instability in the buyer's country. By providing a safety net, it encourages businesses to expand their markets and take on more significant export opportunities.

5 Must Know Facts For Your Next Test

1. Export credit insurance is often provided by government agencies or private insurers, aiming to support domestic companies in accessing global markets.
2. The coverage usually includes risks associated with commercial events like bankruptcy or payment delays, as well as political events such as expropriation or war.
3. Export credit insurance can be a requirement for obtaining financing, as lenders may seek assurance against default risks when exporting.
4. Many countries have their own export credit agencies that offer these services, playing a crucial role in promoting their national exporters.
5. The use of export credit insurance has increased significantly in recent years, reflecting the growing globalization of trade and the need for risk management.

Review Questions

• How does export credit insurance impact a company's decision to enter foreign markets?
  • Export credit insurance provides companies with the confidence to enter foreign markets by protecting them from potential financial losses due to non-payment. This safety net allows businesses to take calculated risks, knowing they have coverage against buyers who may default or face insolvency. Consequently, it can lead to increased export activities as firms feel more secure about their transactions with international customers.
• Evaluate the role of export credit insurance in supporting domestic exporters and its implications for international trade.
  • Export credit insurance plays a vital role in supporting domestic exporters by minimizing their risks when trading internationally. It enhances access to financing, as lenders are more likely to provide loans when they know there's protection against default. The implications for international trade are significant, as this insurance fosters greater participation from smaller firms who might otherwise shy away from exporting due to perceived risks, ultimately boosting overall trade volume and economic growth.
• Assess how changes in global economic conditions can affect the demand for export credit insurance among exporters.
  • Changes in global economic conditions, such as economic downturns or geopolitical tensions, can dramatically influence the demand for export credit insurance. In uncertain environments, exporters may seek more coverage as risks of non-payment rise due to buyer insolvency or unstable political climates. As companies become increasingly aware of these risks and their potential impact on profitability, they may prioritize obtaining export credit insurance, which could lead to growth in the insurance market and alterations in policy offerings by insurers to adapt to these changing needs.

Related terms

Letter of Credit: A financial document issued by a bank guaranteeing that a seller will receive payment from a buyer on time and for the correct amount.

Trade Credit: An agreement between businesses allowing one to purchase goods or services on account without immediate payment.

Political Risk Insurance: Insurance that protects investors and companies from losses due to political instability or changes in the political environment in foreign countries.