Export insurers tighten up, crimping some third-world trade
Banks remain gloomy over third-world debts. But the private credit insurance market is confident it can stay profitable even in the midst of a debt crisis. The reason, say the insurers, is that they exercise caution and selectivity in deciding which risks to cover.
This is not good news, however, for exporters trying to find export credit insurance. Private coverage may cost five to 10 times that of government-administered coverage. And in the event of a claim, the exporter may have to wait for up to one-and-a-half years for payment.
The insurers also face problems in finding protection for themselves by reinsurers - companies (many of them associated with Lloyd's of London) which cover the risks of primary insurers. Few reinsurers believe there is profit where the rest of the world sees debt.
Export credit insurance is important in global trade. It protects the exporter against insolvency, transfer delays, and political risks which could cause the buyer to fail to pay for goods. The private market, however, is quite minor when compared with government export credit operations such as the United States Export-Import Bank or Overseas Private Investment Corporation, Britain's Export Credits Guarantee Board, and France's Coface.
``We are insurers of last resort,'' says Miles Wright, assistant managing director of American International Underwriters UK.
But most government export credit operations are designed to promote domestically manufactured exports and most impose domestic content rules of at least 70 percent. The private sector, says Nigel Farrell of Frizzell Political Risks, a Lloyd's of London broker, can cover goods sourced anywhere, such as those of a multinational pharmaceutical company's subsidiary exporting goods manufactured in a third country.
Costs are cheaper under government export credit operations, but the private market says this is because losses are ultimately borne by the taxpayer. Private insurers have loss ratios (premiums over claims) of 60 to 70 percent. Government operations report 120 percent.
A lack of reinsurance protection has caused most private credit insurers to cut their policy limits. But insurers say any unwillingness to offer terms is entirely driven by a country's trade debt - and there are some surprising choices:
Iran: Insurers react favorably when asked to provide cover for Iran. There have been some claims for Iran failing to open a letter of credit, but Mr. Wright says Iran has never defaulted on a letter of credit. His view is supported by Mr. Farrell who, referring to the many engineering companies that have found Iran a lucrative export market, says, ``If these guys know the right people [in Iran], let them carry on.''
Iraq: Iran's rival receives no such accolade. The country's Rafidain Bank stopped meeting most letter of credit payments in March 1986 and banks will have to roll over an estimated $5 billion of short-term commercial debt. Insurers quote rates of 15 to 16 percent on Iraqi risk on the few occasions when cover is available. Ironically, Iraq's regulated domestic insurance market is profitable and regarded as a paragon by reinsurers.
Algeria: Bankers' difficulties in putting together medium-term loans for Algeria, suffering from lower oil revenues, have impinged on the private insurance market. With government agencies such as Coface cutting back on coverage and many banks reaching their limits on Algerian risks, the private market has experienced an Algeria rush.
``When state agencies retract, that does not mean that we will,'' says Mr. Farrell. For the right kind of contract, with a solvent exporter selling priority goods, he says, cover is almost always available.
East Germany: Because of payment problems with Poland and Yugoslavia, banks tended to lump the whole of Eastern Europe into one boat and pulled out of East German risk. The private market, holding East German and Soviet risk in high esteem, was ``delighted'' to step into the breach, Mr. Wright says.
Brazil: Brazilian bankers are at pains to point out that despite Brazil's suspension of interest payments on its debt, trade finance is not the subject of any moratorium. One banker says if Brazil were to default on import payments, it would be unable to finance more of them.
``The banks perceive that,'' the banker says, ``and continue to finance imports.''
But this short-term finance is only for bare necessities such as raw materials. And government export credit agencies provide only short-term (180-day) cover.
``This is no use for an exporter of manufactured goods,'' says the banker. ``Brazil has to import manufactured goods, and has to pay for them with short-term money. Sooner or later this money will run out, the reserves will be depleted, and the bankers will not get paid.''
This is why bankers and many exporters insist that the private market is no substitute for government export credits. And Brazil is too important, they say, to write off as just a third-world debtor.