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International credit insurance is a type of insurance policy designed for corporations and businesses that carry out financial transactions with customers or other businesses located abroad. Most companies maintain insurance policies that protect their assets domestically, but typically do not cover transactions in different countries. Internationally focused policies are often designed primarily to protect trade and exports, but sometimes broader financial transactions and asset exchanges are also included. As a general rule, this type of insurance tends to have higher rates than domestic policies, and premiums are usually set after an assessment of the solvency, transaction history and location of the entities involved. War-torn countries or nations with political instability often trigger higher rates due to a greater perceived risk of default. International insurance is generally more difficult to formulate for the underwriter also because the risks inherently found across countries, currencies and cultures must be carefully evaluated before an international credit insurance policy can be issued. Determining the appropriate level of risk often requires considering all three factors simultaneously.
Credit insurance generally covers cases where one entity, usually a company, lends money or makes payments to another with the expectation of some sort of compensation, exchange or remuneration. Insurance is usually not necessary for small transactions, but when large sums of money are involved, it can do a lot in terms of protecting creditors’ assets.
There are several different types of credit insurance, generally tailored to the specific needs of the party or parties underwriting the policy. In international environments, policies generally apply to international business transactions. This can be as simple as a business agreement with a foreign subsidiary, or as complicated as a new capital investment abroad. International policies are generally administered not by banks but by professional accounting or auditing firms, most of which are accredited by the Swiss-based International Credit Insurance and Surety Association (ICISA).
Export and Trade Policies
Credit insurance most commonly covers payment risks that result from negotiating or exchanging credit sales with buyers. Coverage is called export credit insurance if only exports are insured. The vast majority of policies cover trade in terms of sales, purchases and exports. Specifics on what is covered and at what cost tend to vary based on the specifics of the parties as well as their location, and most of the time policies are subject to renewal and reassessment periodically – often annually or semi-annually.
Special risks and considerations
One of the things that makes international credit so unique and so much more complicated is the widening range of things that can go wrong. For the most part, policies and premiums are designed, at least in part, on the basis of perceived default risk. In many international scenarios, default can occur for more than simply the insolvency of one party. Riots, wars, political conflicts and other changes can affect whether payment can be expected or not. Foreign credit insurance policies protect against these types of financial risks.
Some of the most substantial risks are those of increased global competition and nationalistic government policies. Governments tend to impose self-serving policies, such as import tariffs; however, many discourage global trade. Risk assessments are usually performed to include these factors in the final coverage.
At one point, political risk coverage was usually acquired only through specialized government programs. This resulted in the client having to obtain two separate and distinct international credit insurance policies, which complicated accounting as well as claims recording and handling. Having separate trade and export policies often required additional administration and awareness of the differences in conditions and requirements defined by each policy. Dual coverage is now typically offered by private insurers rather than government agencies, although, as with most things, there can be exceptions.