The insurance of supplier credit enables the exporter to insure the payment for delivered goods and services against political and commercial risks arising form the concluded commercial contract.
An additional benefit of the insurance policy is assignment of rights to the commercial bank that finances an export transaction for the purpose of securing the loan, i.e. contracting more favourable terms and conditions of financing.
The usual cover ranges between 80% and 90% of the transaction value, depending primarily on the political risk of the buyer’s country.
- The exporter concludes an insurance contract with HBOR and pays the premium.
- The exporter delivers the goods or renders services to the buyer.
- The exporter’s bank extends a loan and uses insurance policy as collateral (endorsement of the insurance policy in favour of the commercial bank).
- The foreign buyer pays for the goods, and obligations under the loan contract are settled.
- In the event that the foreign buyer fails to pay for the goods, HBOR indemnifies the exporter.
Insurance of Losses Incurred in the Course of Production
Within the framework of insurance of supplier credit and buyer/buyer’s bank credit, it is possible to insure losses incurred in the course of production, which represents additional security for the exporter in the case when goods are manufactured by special order and it is not possible to sell them to another buyer. Inability to fulfil a commercial contract is insured for the purpose of enabling the buyer to terminate the contract, as well as the occurrence of a political risk, such as introduction of export ban to the buyer’s country. The indemnity to the exporter is paid in the amount of actual costs arisen in the process of manufacturing certain goods, reduced by the percentage of self-retention, i.e. agreed participation of the exporter in loss.
- non-payment or non-fulfilment obligations by the foreign buyer,
- bankruptcy or liquidation of the foreign buyer,
- Inability to honour the export contract on the part of the insured party or its agents, due to facts for which the insured party is not responsible, and which occur abroad. This definition includes damage incurred in the course of production, where the foreign buyer is a private law entity.
- war or similar events,
- rebellion or revolution,
- government measures limiting and impeding transfer or free disposal of payments,
- Inability to fulfil an obligation under the Export contract due to other political events. This definition includes damage incurred in the course of production, as well as inability to fulfil on the part of the insured party or its agent due to reasons for which the insured party is not responsible, and which occur abroad, where the insured party is a public law entity.
Insured amount is amount on which the insurance is concluded for an individual Foreign Buyer.
Premium rate is the price of the risk taken and is generally paid in advance. It depends on the risk of the buyer’s country, creditworthiness and status of the buyer, past experience with the buyer, duration of the risk, additional insurance and percentage of cover.
Indemnity claim could be submitted after the period determined in the insurance policy (usually 6 months after the payment default).
International rules on export credit insurance and export finance
In case of transactions with repayment periods exceeding 2 years, we follow the OECD regulations (Arrangement on Officially Supported Export Credits), among which the following are the most significant ones:
- Down payment (advance + interim payments) of at least 15% (in the case of vessels, at least 20%).
- Maximum repayment terms are determined in accordance with the classification of the buyer’s country in the following manner: for Category I countries*: the maximum repayment term is 5 years; for Category II countries**: the maximum repayment term is 10 years; in case of financing construction of renewable energy resources, as an exception, the maximum repayment term can be up to 15 years.
- Repayment of principal is normally effected in equal semi-annual instalments, with the first instalment falling due six months after the beginning of the loan repayment.
- Beginning of the loan repayment – varies in accordance with the nature of goods and services.
* Category I countries – GNP per capita in excess of USD 6.275;** Category II countries – GNP per capita USD 6.275 or less
Insurance contracting procedure
- After receiving information about an international tender or already initiated export transaction negotiation, HBOR is notified about the project and its readiness in principle for the provision of export transaction insurance coverage or the issuing of a Letter of Intent is requested.
- After the export contract has been concluded, which must conform to the international regulations on export credit insurance and export finance (The Berne Union General Understanding, OECD Consensus), an insurance policy application is submitted.
- If the exporter produces goods upon a special order, cover may be provided for the loss during the production process by means of an additional insurance contract.
- Conclusion of the insurance contract and payment of the premium.
- After the export contract has been concluded exporter is obligated to inform HBOR about its implementation on regular basis.
- If one of the insured risks occurs, and if the insured party has fulfilled its obligations under the export contract, HBOR shall, upon the receipt of a claim submitted by the insured party and upon the review of the documentation, pay the indemnity.