In theory, exporting is very simple — a foreign buyer places an order and the exporter fills it. But completing the transaction and actually getting paid is another story entirely.
There are many risks associated with exporting, but the most common is that of not being paid by the foreign buyer. Most foreign buyers prefer not to pay cash in advance of the shipment, instead delaying payment for some period of time. That means the exporter is taking a credit risk. Furthermore, when an exporting company is waiting to get paid, their working capital is tied up, perhaps making it difficult for them to finance the next round of production.
An insurance market has developed that helps companies manage the risks associated with exporting, whether in the form of credit risk, political risk or contract performance risk. For example, in exchange for payment of a modest insurance premium, an insurance company checks out the foreign buyer, monitors their financial situation over time, and simply pays the exporter if something goes wrong and the payment does not arrive. The insurance company is in a position to manage these risks because it can create a large, diversified pool of exposures, and because it can develop and tap into databases on importing companies to assess the situation.
For the exporter, especially a small company, paying a small insurance premium means being able to sleep at night and can also mean a bigger line of credit with their bank, which treats the insurance policy as “money in the bank.” On occasion, an exporter might even refuse to fill an order when the foreign buyer is completely unknown, unless some sort of insurance is available. In short, financial intermediation in the form of insurance is a key facilitator of the growth of international business and the global economy.
These insurance services are offered by a range of private insurance companies and official export credit agencies, like EDC. And, like EDC, many of these entities belong to the Berne Union — more formally, the International Union of Credit and Investment Insurers — which provides a forum where members can exchange information and coordinate the evolution of insurance practices. The Berne Union, which was established in 1934, has 52 members from 42 countries, including EDC, and the group shares a common set of operating principles. They can also act as a group in response to industry-wide risks, such as when the Asian crisis erupted back in 1997.
How important is this association? Global exports are estimated to have exceeded US$10 trillion in 2005, and the members of the Berne Union are estimated to have facilitated close to 10% of the total. Considering that a high and rising proportion of international trade today is undertaken between related affiliates of globalised companies, and therefore goes uninsured, the Berne Union could be facilitating as much as 20% of the world’s non-multinational international trade.
The bottom line? The Berne Union and its members are like the grease that keeps your wheels turning. The thing is, the better they are at their jobs, the less visible they are, and the less appreciated. But chances are that some percentage of your income is due to their efforts.
March 2, 2006
The views expressed here are those of the author, and not necessarily of Export Development Canada.
