Political Risk Insurance; Export Credit Insurance

Export credit insurance can protect a creditor company involving in exporting against bad debt losses due to a wide range of risks including customer insolvency, protracted payment default, or political risk such as actions taken by the government of the country to which goods have been exported that makes it impossible for the buyer to pay the seller/exporter.  In other words, political risk insurance protects exporters against losses that result from Political Violence, Confiscation of Exported Goods, Expropriation of Assets by the government, Nationalization of previously privately held companies... and in some instances the inconvertablity of local currency into U.S. dollars or whatever currency the seller lists on its invoice. 

Any company considering purchasing export credit insurance needs to consider whether or not to purchase coverage against political risk in addition to simple payment default.  More broadly defined, political risk events include contract frustration, embargoes, currency inconvertability issues, and natural disasters that result in a loss to the insured creditors. Political risk insurance can cover:

• Transfer risk, the inability of the buyer to transfer currency out of its country
• Currency restrictions that may take the form of new, more restrictive foreign exchange regulations or a failure by exchange control authorities to act on an application for hard currency. This coverage protects against the inability to convert local currency into foreign currency and/or the inability to transfer it out of the buyer's country. (Note: political risk coverage does not protect against the devaluation of a country's currency.)
• Expropriation, nationalization, or confiscation of the buyer's business without compensation by the buyer's government
• The buyer's default on its obligations under an arbitration award or court decision made in favor of the exporter
• The enactment of any law, order, embargo, by the buyer's country that prevents the buyer from fulfilling its obligations under the contract (sometimes referred to as contract frustration)
• War, or damage caused by war or any other disturbance within the buyer's country
• Newly imposed import restrictions that cancel valid import licenses. 

In theory, export credit insurance allows sellers to expand and develop business overseas by protecting sales against loss caused by a foreign buyer, or a foreign government for political or commercial reasons. In practice, it depends on whether the exporter can get the accounts covered and the amounts of coverage required in its application form.

© 2010 by Michael C. Dennis.  All Rights Reserved.  Michael is author of "Credit and Collection Forms and Procedures Manual."  He can be reached by email at mcdennis13@yahoo.com