Encouraging Exports.

As U.S. businesses took for ways to increase business outside the United States, export credit insurance is gaining popularity.

The U.S. market for export credit insurance is expanding rapidly as exporters look for ways to maximize foreign sales while minimizing risk.

Export credit insurance protects commercial accounts receivables against nonpayment, enabling companies to offer more competitive payment terms and access more cost-effective financing. As a result of carrying export credit insurance, exporters are able to increase their borrowing against foreign receivables and offer credit terms to overseas buyers.

Historically, the majority of U.S. exports were shipped on secured terms, such as letters of credit. Today, exporters face intense pressure to offer their customers more liberal terms of payment to compete with foreign suppliers, and they're using export credit insurance as a tool.

Macroeconomic factors also are driving an interest in exporting and export credit insurance. The U.S. trade deficit jumped 65% from $164.3 billion in 1998 to $271.3 billion in 1999, and imports increased by about 12% due to a strong domestic economy. These economic forces have resulted in a political mandate to decrease the deficit and a political response by the Clinton administration. The recent focus of the U.S. Export Import Bank has been to:

* support the growth of exports to developing countries;

* support and enhance exports by small businesses in the United States; and

* enhance the export of environmentally beneficial products overseas.

Although the United States has a larger gross domestic product than any European economy, its relative use of export credit insurance is significantly lower. American Credit Indemnity Co., a leading export credit market, estimates that the total market potential for credit insurance premium in North America is $2 billion to $3 billion, while the current penetration is about 10% to 15%.

Underwriting Buyers vs. Exporters

The export credit insurance markets can be divided into two general categories: buyer underwriters and exporter underwriters. Buyer underwriters focus on underwriting the risk of the customer base by reviewing the credit-worthiness of the majority of the supplier's customers. The European market has a history of buyer underwriting and has developed extensive databases of information on individual customers worldwide. This approach allows an outsourcing of the international credit-management function, because the insured can confirm the credit-worthiness of its buyer base through the insurer's approval process.

The evolution in the U.S. market began more recently and has resulted in a concentration of exporter underwriters. In the early 1980s, American International Group began underwriting export credit insurance, concentrating on Fortune 1000 and middle-market companies with strong, established credit procedures and a proven track record of exporting. They effectively underwrote the expertise and track record of the exporter--or insured--offering a high level of discretionary authority.

Other prominent exporter underwriters such as FCIA Management Co. and Trade Underwriters Agency Inc. joined the private-sector U.S. marketplace in 1991 and 1992.

Most recently, the leading European credit insurers have begun entering the U.S. market to offer buyer-underwriting capabilities. American Credit Indemnity is a part of the Euler Group, the world's largest business credit insurer. The shareholders of Euler include Swiss Re (20%), Scor (11.8%) and AGF (68.2%). AGF is 51% owned by Allianz, the world's largest insurance company. NCM Americas was founded in 1992 and is 100% owned by the NCM Group. The NCM Group is 90% owned by Swiss Re. The Gerling Credit Insurance Group is a member of the Gerling Group, a leading player in the German and international commercial markets.

Companies might find that they need buyer underwriters or exporter underwriters at different stages of their own life cycles. For example, an existing company with an established customer base might decide to develop an e-commerce initiative by setting up a dot-corn subsidiary. The subsidiary would allow major expansion of its customer base but would require significantly increased resources to handle the credit-management function. A buyer underwriter would effectively provide an outsourcing of buyer credit review until the exporter's credit department could develop its own due-diligence procedures and track record.

Many of the European companies now are offering increased discretionary credit limits as well as the extensive buyer databases.

Capital Markets Export Financing

Export credit insurance is typically required by banks to advance funding on foreign receivables. This allows the bank to transfer the majority of the risk to the insurer, rather than to apply it against its own internal country lending limits.

During the past 10 years, the use of asset-backed financing of trade receivables has increased dramatically. Securitization of trade receivables has grown from $20 billion in 1991 to around $180 billion in 1999.

This type of financing represents the process of transferring financial claims into marketable securities, which can be sold in the public and private capital markets. It also allows companies that might not be rated by the large credit-rating agencies to access capital markets by transferring risk to a more highly rated insurer. The result enhances shareholder value by allowing an insurance company to access the more cost-competitive capital markets.

Credit insurance is a means of enhancing a securitization, replacing some of the overcollateralization that traditionally has been required. In addition to enabling more price-competitive financing for insureds, this offers insurance providers the chance to provide greater flexibility than ever before where it's needed most.

Lee McLaughlin is vice president of the Financial Risk Solutions segment of Near North National Group, Chicago.

Making the Most of Export Credit Insurance

Widely used by European companies, export credit insurance is beginning to make its mark in the United States. Here are some of its key advantages:

* It promotes export sales by allowing more flexible payment term options.

* It minimizes the risks of selling in overseas markets.

* It accelerates cash flow by facilitating financing.

In addition, companies using export credit insurance are looking for insurance providers to:

* manage export sales consistent with a company's overall risk-management strategy;

* offer flexible programs that can be expanded to include additional subsidiaries; and

* work with financial partners experienced in administering export-receivables programs.

Export Credit Risk Primer

As companies continue to extend their client base to foreign markets, they increasingly incur credit risks. One of the big benefits export credit insurance offers is risk mitigation. Typically there are three areas of risk:

* Commercial risk: Nonpayment for commercial reasons.

* Political risk: Nonpayment for political reasons, such as withdrawal of previously issued import/export licenses or confiscation of goods and permits.

* Transfer risk: The inability to convert local currency into policy currency, provided that the local currency was deposited in accordance with existing laws and regulations.

Export credit insurance is based upon the underlying contract of sale. A fundamental requirement is a legally enforceable obligation, so in the event of nonpayment, there is recourse if the insurance company has to collateralize its position. Standard exclusions include disputes, wrongful or dishonest acts of the insured, insolvency of the exporter, failure to comply with basic requirements or breach or inaccuracy of warranties.

Coface Launches Online Credit Ratings, Cover for Virtual Transactions

Coface Group, an international export credit insurer based in France, has launched @rating, an online credit rating system that enables U.S. companies to demonstrate their reliability to business partners worldwide and to check the reliability of the partner. Along with @rating, Coface introduced Virtual Market Cover, a credit insurance policy that protects both domestic sellers and exporters against nonpayment or receivers against nondelivery.

The two work together in that transactions with @rated companies can be automatically covered. In the world of business-to-business e-commerce, trust and security are very important issues, said Daniel Boccara, chief executive officer of Coface's U.S. information unit, Veritas of New Haven, Conn. "People used to visit their customers, but now they never meet, so you have to ask, 'How much can I trust you,'" he said.

Virtual Market Cover can be used to protect shipments from California to Florida as well as from California to China. The policies are written through a contract with CNA Credit, the credit insurance arm of CNA Financial Corp., Chicago. "Today, many U.S. companies bypass potential attractive overseas e-commerce transactions because the risk of reliability appears too great," said Michael Ferrante, president of CNA Credit, in a statement. "@rating coverage minimizes the risk."

Ratings and coverage can be accessed online at www.cofacerating.com. Virtual Market Cover applies only to e-commerce transactions, Boccara said. @rating can be useful for offline as well as online transactions.

@rating currently has 35 million companies in 150 countries in its database, the company said. Ratings are based on publicly available information plus information provided by the company. Companies can have a comprehensive rating for a $600 fee the first year and $300 the following year. Potential business partners can examine the ratings of a selected group of 600,000 companies free of charge, Boccara said. To access other ratings, companies must pay $15 per rating, which includes a monitoring report of that company for a year.

Companies are rated @@@, @@, @ or fragile. Transaction coverage limits can go as high as $100,000, depending on the rating, Boccara said. Coverages are sold for a flat rate, he said.

@rating has been launched in 11 countries in Latin America, Asia and Europe and will be introduced in 80 countries by the end of this year, the company said. The technology is compatible with wireless technology, so checking a rating can be done with a portable telephone.

The @rating and Virtual Market Cover package can be enriched with a secure identification of transactions system through Gemplus smart cards and an international ordering and payment system offered through TradeCard Inc.

The Internet business-to-business marketplace is expected to grow from $150 billion in 1999 to $7 trillion in 2004, Boccara said. About 23% of companies that go bankrupt do so because of bad debt, he said.

"Companies must decide, 'If I have to be on the Internet, what level of security do I need?'" Boccara said.

Sally Whitney