Export Insurance

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3. Financial Tools for Risk Aversion

About the three major risks mentioned in the early section, none of them could be 100%

natural hedged by special arrangements of transactions. Although Trading Risk, Cash Flow Risk, and Exchange Rate Risk are all important for exporters, the most concern for exporters will still be the Trading Risk. The most difficult part to have a successful deal is to know that who is the right partner to cooperate with and who will keep promise, instead of playing games while trading. Therefore, this section will focus on dealing with the Trading Risk by introducing three solutions, such as Export Insurance, International Factoring Service, and Stand-by Letter of Credit.

3.1. Export Insurance

In order to have comprehensive understanding of export insurance, a trading specialized bank, The Export-Import Bank of the Republic of China (Exim bank), shall be introduced as the base knowledge of the financial service- Export Insurance.

Exim bank was established on January 11, 1979, under the Export-Import Bank of the Republic of China Act. It is a state-owned bank supervised by the Ministry of Finance. Its mission is to promote export trade and develop the economy, while its vision is to strengthen trade finance and assist external trade. Exim bank’s main objective is to support government economic and trade policies by providing financing, guarantees and export credit insurance to help enterprises expand external trade and overseas investments. It also increases international cooperation to ensure the steady and continuous development of Taiwan's economy.

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The export credit insurance offered by Exim bank includes Comprehensive Export Credit Insurance for document against payment (D/P) and document against acceptance (D/A) transactions, Comprehensive Export Credit Insurance for open account (O/A) transactions, Export Credit Insurance for Small and Medium Enterprises, Export Credit Insurance for letter of credit (L/C) transactions, Medium- and Long-term Deferred Payment Insurance, Overseas Investment Insurance, and Global-Sure Credit Insurance. According to the internal information, Export credit insurance coverage of 2010 totaled NT$63,957 million, with a year-on-year increase of 10.17%.

Although the range of export insurance offered by Exim bank could almost cover all the trading types, including L/C, D/A, D/P, O/A, Medium & Long term deferred deals, Overseas Investment transaction, and package insurance products, such as Global-Sure Credit Insurance, which is similar to the operation of commercial credit insurance. Since the paper emphasize on Non-LC (D/P, D/A, and O/A) transactions, the first step for Taiwanese exporters is to know how to apply for Export Insurance to cover buyers’ trading risk. The following figure shows the procedure of applying export insurance in terms of Non-LC transactions.

Figure 3.1: Procedure of Export Insurance

Owning to the reason that Exim bank is a 100% stated-owned bank with specialized focus

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and mission of government policy, Exim bank is not allowed to support foreign enterprises or OBU registered companies. Therefore, Taiwanese exporters are the only focus and target for Exim bank to serve. As the figure shows, Taiwanese exporters have to provide credit reports to Exim bank so that the credit limit could be underwritten by Exim bank. If exporters have no clue or channel to provide credit report, they could rely on the credit service through Exim bank by its group deal with cheaper price of credit reports. Table 3.1¹⁵ is the Credit Reports Fees by Exim bank’s offer. No matter what countries the applicant like to inquire, the price range is generally from NT$ 1,200 to NT$ 4,800. However, if an applicant wants to inquire credit reports by itself without going through Exim bank, the price will be 2 to 3 times higher than the price offered by the below Table.

Table 3.1: Credit Rate Sheet by Country

COUNTRY NT$ COUNTRY NT$ COUNTRY NT$

15 The credit checking fees is referred from the website of The Export-Import Bank of R.O.C.

www.eximbank.com.tw

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18 DOMINICAN 3,000 42 KUWAIT 3,350 66 TRINIDAD & TOBAGO 3,050 19 ECUADOR 3,000 43 LUXEMBOURG 3,000 67 TURKEY 1,800 20 EGYPT 3,350 44 MALAYSIA 3,150 68 U.S.A. 2,850 21 FIJI 3,200 45 MEXICO 3,050 69 UNITED ARAB EMIRATES 3,350 22 FINLAND 3,100 46 MOROCCO 2,800 70 UNITED KINGDOM 2,500 23 FRANCE 2,150 47 NETHERLANDS 2,250 71 URUGUAY 2,700 24 GERMANY 1,700 48 NEW ZEALAND 4,800 72 VENEZUELA 3,000

After applying the report, foreign credit agency will be mandated for making the latest report for Exim bank to decide whether the buyer is qualified enough to offer the risk credit. Once got the notification from Exim bank, exporters could insure the shipment after the on board date. Finally, Exim bank will issue Insurance Certificate and insurance receipt once exporters pay the premium. To sum up, Exim bank try to make the procedure as simple as it could be so that each Taiwanese enterprises, no matter listed companies or SME, could enjoy the government policy to benefit themselves from avoiding trading risk in the international business.

Last but not least, Export Insurance provides IDEAL services as the following:

(1) Inquire

Exporters can make good use of credit checking services to have deeper understandings of foreign buyers by cheaper price offered by Exim bank. Besides, if the insured amount of foreign buyer exceed to certain amount, now is NT$ three million, Exim bank will pay for the credit checking fees as a feedback of premium.

(2) Diagnose

Buyers’ credit will be verified by the Exim bank underwriters with no charge.

Sometimes this is a good way to test whether the foreign buyer is a good one to cooperate with or a cheater or a fake company. The underwriting process is the best way for exporters to diagnose their buyers’ credits without actually knowing each other.

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(3) Exposure

Exporters will acquire the credit of buyers from Exim bank. The approved credit could be taken as a standard for internal control. If exporters sell goods below the credit limit, all of their shipment will be protected mostly (80% -90%) by the export insurance.

(4) Administrate

It is easy for a company to manage 10 or 20 buyers at the same time. However, it will become extremely difficult to manage over 50 buyers with different countries and culture backgrounds. The best way for companies to manage the buyers’ risk is to take Export Insurance as one of the must in Standard Operating Procedure. In that case, companies do not need to pay too much attention to the selection of buyer. Instead, companies will have more energy to develop their business.

(5) Loss Indemnity

The most important of Export Insurance is the loss indemnity once buyers default. Exim bank is not a profit-oriented company, instead more willing to help Taiwanese companies.

Once suffered the situation of default, the problematic case will be discussed in Export Insurance Committee, which is a fair and open committee, to decide the result of the claim. In other words, loss indemnity for clients is the most concern of Exim bank rather than profits concern of commercial insurance company.

3.1.1. Export Credit

As for Cash Flow Risk and Exchange Rate Risk, Exim bank undoubtedly provides financial services, Export Credit, to reduce both Cash Flow Risk and Exchange Rate Risk. To keep it simple and easy, Taiwanese exporters do not need to provide any fixed deposits or collateral as payment protection, instead only provide Exim bank with Insurance Certificate and receipt, which are also issued by Exim bank. Then, exporters can drawdown the credit for funding right after shipment to avoid Cash Flow Risk and Exchange Rate Risk as well. Figure 3.2

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shows the operating procedure of Export Credit for Taiwanese Exporters.

Figure 3.2: Operating Procedure of Export Credit

Based on the cover from Export Insurance, Taiwanese Exporters can apply Export Credit without providing any other collateral. Furthermore, they are allowed to use their original banking account. This is a very different way compared to other commercial banks. In general, banks is very much like to receive deposits as their low interest funding resources and lend the deposits out as banking loans to make profits. Therefore, it is very convenient to apply Export Credit without going through troublesome account-opening procedures.

After signing contracts or getting the order from foreign buyers, exporters can apply both Insurance credit and loan credit. This doings can save time for standard banking procedure.

Once got approval from both, exporters can deliver goods to foreign buyers and drawdown loan credit after shipment on board. Thereafter, Exim bank would provide 80 to 85% of total shipment, which are all covered by the credit line of Export Insurance. At the stage, exporters have already got the most part of future payments and naturally avoided Cash Flow Risk and Exchange Rate Risk at this moment.

For example, if the payment term is D/A 90 days after shipment, exporters will get the

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payment after 90 days from importers. Even with Export Insurance covered the political risk and credit risk of foreign buyers, Taiwanese exporters will still suffer Cash Flow Risk and Exchange Rate Risk in the coming 3 months. Therefore, if exporters could get the most part of payment (80-85 %) from Export Credit after shipment, it is convenient for them to avoid both risks simply by one action. After 90 days, importers will make the payment through the channel of Exim bank and corresponding bank. Finally, Exim bank will calculate the interests and procedure fees and remit the residual payment to exporters.