Protecting against credit and political risk.

When exporting to overseas markets where credit and financial information often is not as readily available as it is in the United States and business and accounting practices differ, credit managers face the risks of currency inconvertibility, economic and political instability and adverse government actions in addition to customer insolvency. This makes offering foreign buyers open account payment terms--a practice dictated by competitive pressures in many overseas markets--a daunting challenge. Fortunately, these risks--plus losses caused by late customer payments--can be mitigated by properly structured credit and political risk insurance, available at surprisingly reasonable cost.

For some exporters, financing is an important consideration and lenders often are loath to advance funds against open account export sales. The addition of credit and political risk insurance will convert the accounts receivable underlying these transactions into eligible collateral. (If required, the lender can be named as loss payee.)

Credit insurance has been widely used in Europe for many years. North American companies, particularly those in the United States, tend to rely on credit and collection professionals to manage trade credit. However, a growing number of U.S. companies now resort to credit insurance to protect against unexpected major customer insolvencies (domestic and international) that can take even the best credit department by surprise. For U.S. companies engaged in global trade or those with fixed or mobile assets located abroad, the government-sponsored Export-Import Bank of the United States as well as the Overseas Private Investment Corporation offers a wide array of insurance programs. In recent years, several American private sector insurers have developed export credit and political risk programs. In fact, it has been said New York is rapidly replacing London as the export credit and political risk insurance capital of the world.

There are two credit insurance underwriting philosophies:

* Named buyer. The insurance company acts as the insured's export credit department, setting credit lines for individual customers and assuming the credit risk. In some cases, the insurer also will make arrangements for collecting delinquent accounts.

* Excess of loss. This coverage is appropriate for companies with established overseas customer relationships and the ability to perform their own international credit administration. Excess-of-loss insurance requires the insured to retain its normal credit losses through the use of deductibles and coinsurance but provides a safety net in the event of catastrophic loss.

Under both arrangements, political risk coverage is offered to exporters by some (but not all) private sector insurers.

Political risk insurance--for companies with overseas investments--provides protection against financial loss caused by unexpected, discriminatory or arbitrary acts of foreign governments. These include confiscation, expropriation or nationalization of assets, contract termination, license termination and embargo, currency inconvertibility or nontransfer of payments and wrongful calling of "on demand" guarantees.

Credit and political risk insurance often is best accessed through specialized brokers. They negotiate on the insured's behalf, have access to the entire insurance market--overseas and United States--and are uniquely qualified, by experience, to recommend and negotiate the most appropriate and cost-effective risk transfer strategies for their clients. While not many such brokers practice in the United States, CPAs can seek referrals from credit insurance companies and banks.

--Thomas M. Fitzgerald Jr., vice-president of The Credit International Associates in New York City.