The Bad Debts of Exporting. Why it's doubly important to insure against not being paid
| Date | 01 November 1981 |
| Published date | 01 November 1981 |
| Pages | 16-17 |
| DOI | https://doi.org/10.1108/eb057220 |
| Author | Alec Snobel |
| Subject Matter | Economics,Information & knowledge management,Management science & operations |
The Bad Debts of Exporting
Why it's doubly important to insure against
not being paid
by Alec Snobel, BSc (Econ)
Why is an investment invariably insured against loss or
damage? Ask a factory manager why, when he has
taken all reasonable precautions to prevent fire, flooding
and theft, he then insures his plant and premises against
those same risks. He will tell you something like "peace
of mind" . . . "accidents happen" ... or that "you
can't control Acts of God - and I can't afford disrup-
tion of my company's operations, let alone go out of
business". And "anyway, the premium costs are a legi-
timate overhead".
Put the same sort of question to an export manager
whose company is not insured against non-payment by
its overseas customers and he might say that he has
considered this form of cover and declined to proceed.
In other words the factory manager sees the acquisition
of fire insurance as part of normal business activities,
but export credit insurance is considered as an optional
extra or as a drain on profits. The exporter may believe,
in vindication of his position, that his overseas custom-
ers are wholly reliable and that he knows them well.
This is fine when it comes to the commercial risks -
default in payment or insolvency of the buyer - because
the information he holds on his customers may be
comprehensive and up-to-date. But what of the "politi-
cal"
risks? What if the government of one of his cus-
tomers withdrew the import licences, or commercial
road, rail and air links between the port and the buyer
were severed? Or the overseas government refused to
sanction the transfer of funds? The picture then would
not be quite so clear or optimistic.
A company which knows all its overseas customers is
a fortunate one; it could claim, with some justification,
that export credit insurance was not necessary in its
case.
But few exporters are in that position of having
current and good quality information. Most companies'
overseas sales accounts turn over regularly, if slowly,
and to offset accounts losses they will need to find new
customers in existing markets and to break into new
markets. This means that export business can only be
handled with the exporter assuming liability for the
commercial and political risks of not being paid, or sec-
uring payment in ways that may not be acceptable to the
buyer (casting doubts on its ability to pay - not always
the best way to maintain a good customer relationship),
or by taking out credit insurance.
As proof of the risks of exporting, in 1979/80 the
Export Credits Guarantee Department (ECGD) paid
out £264 million in claims to exporters, nearly double
the previous year's figure of £134 million. Of the £264
million, £179 million arose from political causes such as
debt rescheduling and transfer delays - the political
"Acts of God" - more than double the 1978/79 claims
figure of £84 million.
Since the UK government set up the Export Credits
Guarantee Department in 1919 - the Department is the
world's oldest export credits insurance authority -
exporters have been able to cover themselves against
commercial and political risks. The standard policy
issued by ECGD, and one which comprises 80 per cent
of the Department's business, is the Comprehensive
Short-Term Guarantee. Provided an exporter fulfils his
side of an export contract, ECGD will pay a percentage
of a loss: 90 per cent in the case of failure to pay within
six months or of the buyer's insolvency, and 95 per cent
cover for the political causes. Cover, based on a
12-month period, is applicable to a wide range of export
markets for consumer goods sold on credit terms of up
to 180 days. The premium is payable in two parts: the
first, payable annually at the beginning of the policy
term and non-refundable, is assessed on the exporter's
whole export turnover for the previous year. The sec-
ond part is due monthly and is calculated on the total
value of the previous month's exports at a flat rate fixed
at the outset.
This short-term cover can be extended to cover pro-
duction engineering goods involving credit in excess of
six months and up to five years. The insurance is avail-
able under the Supplemental Extended Terms Guaran-
tee to existing holders of the Comprehensive Short-
Term Guarantee. Cover under the extended terms pol-
icy is broadly the same, the main difference being that
the premium is calculated on each individual item of
business according to the period of risk and the market.
Exports of one-off capital goods and projects involv-
ing credit in excess of two years are covered by Specific
Guarantees. As the name implies, each transaction is
Export credit insurance is
considered as an optional extra
or as a drain on profits
In 1979/80 the Export Credits
Guarantee Department paid out
£264 million in claims to exporters
16 INDUSTRIAL MANAGEMENT + DATA SYSTEMS
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