C hapter 14 Risk and Insurance / ECGC

Exporter Payment Risks Physical/Transit Risks Exchange Rate Fluctuation Risks Identification of Risk: Types of Risks involved Evaluation of Risk: Nature and Degree of Risk, Amounts involved Selection of the best prevention measures Implementation of the chosen alternative(s) Exporter

Exporter

Payment Risks

Physical/Transit Risks

Exchange Rate Fluctuation Risks

Credit Risks Failure of the buyer to make the payment due within the credit duration Insolvency of the buyer Buyer's failure to accept the goods, although the goods match the contracted standards.

Failure of the buyer to make the payment due within the credit duration

Insolvency of the buyer

Buyer's failure to accept the goods, although the goods match the contracted standards.

Export Credit Guarantee Corporation (ECGC) ECGC provides: A range of credit risk insurance covers to exporters against loss in export of goods and services. Guarantees to banks and financial institutions to enable exporters obtain better facilities from them. Special schemes like Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity. Cont….

ECGC provides:

A range of credit risk insurance covers to exporters against loss in export of goods and services.

Guarantees to banks and financial institutions to enable exporters obtain better facilities from them.

Special schemes like Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity.

ECGC Products and Services : 1. Credit Insurance Policies SCR or Standard policy Turnover policy Small Exporter's policy Specific Shipment policy short-term Buyerwise policy short-term Consignment Exports policy Buyer Exposure policies IT - Enabled Services (Specific Customer) policies Insurance cover for buyer's credit and line of credit Cont….

ECGC Products and Services :

1. Credit Insurance Policies

SCR or Standard policy

Turnover policy

Small Exporter's policy

Specific Shipment policy short-term

Buyerwise policy short-term

Consignment Exports policy

Buyer Exposure policies

IT - Enabled Services (Specific Customer) policies

Insurance cover for buyer's credit and line of credit

Guarantees to Banks Packing Credit Guarantee Export Production Finance Guarantee Post Shipment Credit Guarantee Export Finance Guarantee Export Performance Guarantee Export Finance (Overseas Lending) Guarantee 3. Maturity Factoring Special Schemes Transfer Guarantee Overseas Investment Insurance Exchange Fluctuations Risk Cover Constructions Work Policy Specific Policy for Supply Contract

Guarantees to Banks

Packing Credit Guarantee

Export Production Finance Guarantee

Post Shipment Credit Guarantee

Export Finance Guarantee

Export Performance Guarantee

Export Finance (Overseas Lending) Guarantee

3. Maturity Factoring

Special Schemes

Transfer Guarantee

Overseas Investment Insurance

Exchange Fluctuations Risk Cover

Constructions Work Policy

Specific Policy for Supply Contract

Standard Policy Standard Policy offers to cover risks in respect of all shipments on short-term credit (credit not exceeding 180 days) by exporters with an anticipated annual turnover of more than Rs. 50 lakhs. This policy is also called Shipment (Comprehensive Risk) Policy or SCR. Standard Policy covers the following commercial and political risks from the date of shipment.

Commercial Risks Insolvency of the buyer. Failure of the buyer to make the payment due within a specified period, normally four months from due date. Buyer's failure to accept goods, subject to certain conditions.

Commercial Risks

Insolvency of the buyer.

Failure of the buyer to make the payment due within a specified period, normally four months from due date.

Buyer's failure to accept goods, subject to certain conditions.

Political Risks Imposition of restriction by the government of the buyer's country or any government action. War, civil war, revolution or civil disturbances in the buyer's country. New import restrictions or cancellation of a valid import licence in the buyer's country. Interruption or diversion of voyage outside India resulting in payment of additional freight or insurance charges. Any other cause of loss occurring outside India, not normally insured by general insurers, and beyond the control of both exporter and buyer. Cont….

Political Risks

Imposition of restriction by the government of the buyer's country or any government action.

War, civil war, revolution or civil disturbances in the buyer's country.

New import restrictions or cancellation of a valid import licence in the buyer's country.

Interruption or diversion of voyage outside India resulting in payment of additional freight or insurance charges.

Any other cause of loss occurring outside India, not normally insured by general insurers, and beyond the control of both exporter and buyer.

The following risks are outside the scope of the Standard Policy: Commercial disputes including quality disputes raised by the buyer, unless the exporter obtains a decree from a competent court of law in the buyer's country in his favour. Causes inherent in the nature of goods. Buyer's failure to obtain necessary import or exchange authorisation from authorities in his country. Insolvency or default of any agent of the exporter or of the collecting bank. Loss or damage to goods which can be covered by general insurers. Exchange rate fluctuation. Failure or negligence on the part of the exporter to fulfil the terms of the export contract.

The following risks are outside the scope of the Standard Policy:

Commercial disputes including quality disputes raised by the buyer, unless the exporter obtains a decree from a competent court of law in the buyer's country in his favour.

Causes inherent in the nature of goods.

Buyer's failure to obtain necessary import or exchange authorisation from authorities in his country.

Insolvency or default of any agent of the exporter or of the collecting bank.

Loss or damage to goods which can be covered by general insurers.

Exchange rate fluctuation.

Failure or negligence on the part of the exporter to fulfil the terms of the export contract.

Turnover Policy Turnover policy is a variation of the standard policy for the benefit of all large exporters who pay a total premium of Rs. 10 lakhs or more in a year. It envisages projection of the export turnover of the exporter for a year and the initial determination of the premium payable on that basis, subject to adjustment at the end of the year based on actuals. The policy provides additional discount in premium with an added incentive for increasing exports beyond the projected turnover and also offers simplified procedure for premium remittance and filing of shipment information. The holders of turnover policy need not submit monthly declarations of shipment. The basic premium rates applicable for the standard policy will apply to the turnover policy also.

Small Exporter's Policy Small Exporter's Policy is issued for a period of 12 months. Premium payable is determined on the basis of projected exports on an annual basis. No claim bonus in the premium rate is granted every year at the rate of 5%. Shipments need to be declared quarterly. Small exporters are required to submit monthly declarations of all payments remaining overdue by more than 60 days from the due date. For shipments covered under the Small Exporter's Policy. The normal waiting period for claims under the Small Exporter's Policy is two months. In order to enable small exporters deal with their buyers in a flexible manner.

Small Exporter's Policy

Small Exporter's Policy is issued for a period of 12 months.

Premium payable is determined on the basis of projected exports on an annual basis.

No claim bonus in the premium rate is granted every year at the rate of 5%.

Shipments need to be declared quarterly.

Small exporters are required to submit monthly declarations of all payments remaining overdue by more than 60 days from the due date.

For shipments covered under the Small Exporter's Policy.

The normal waiting period for claims under the Small Exporter's Policy is two months.

In order to enable small exporters deal with their buyers in a flexible manner.

Specific Shipment Policy (Short-Term) Specific Shipments (commercial and political risks) Policy - short-term Specific Shipments (political risks) Policy - short-term Specific Shipments (insolvency or default of L/C opening bank and political risks) Policy – short-term The following risks are excluded from the scope of SSP-ST: Commercial disputes including quality disputes raised by the buyer. Causes inherent in the nature of goods. Buyer's failure to obtain necessary import. Insolvency or default of any agent of the exporter or of the collecting bank. Loss or damage to goods. Exchange rate fluctuation. Failure of exporter to fulfil terms of export contract or negligence on his part. Non-payment under a letter of credit due to any discrepancy pointed out by the L/C opening bank.

Specific Shipment Policy (Short-Term)

Specific Shipments (commercial and political risks) Policy - short-term

Specific Shipments (political risks) Policy - short-term

Specific Shipments (insolvency or default of L/C opening bank and political risks) Policy – short-term

The following risks are excluded from the scope of SSP-ST:

Commercial disputes including quality disputes raised by the buyer.

Causes inherent in the nature of goods.

Buyer's failure to obtain necessary import.

Insolvency or default of any agent of the exporter or of the collecting bank.

Loss or damage to goods.

Exchange rate fluctuation.

Failure of exporter to fulfil terms of export contract or negligence on his part.

Non-payment under a letter of credit due to any discrepancy pointed out by the L/C opening bank.

Buyerwise Policy (Short-Term) Buyerwise Policies - Short-Term (BP-ST) provide cover to Indian exporters against commercial and political risks involved in export of goods on short-term credit to a particular buyer. The policy would be valid for a period of one year. The percentage of cover normally available under the policy would be 80% of the gross value of the shipments covered.

Consignment Exports Policy Consignment Exports (Stock-holding Agent) Policy. Consignment Exports (Global Entity) Policy.

Consignment Exports Policy

Consignment Exports (Stock-holding Agent) Policy.

Consignment Exports (Global Entity) Policy.

Buyer Exposure Policies Exposure (Single Buyer) Policy - for covering the risks on a specified buyer. Exposure (Multi Buyer) Policy - for covering the risks on all buyers.

Buyer Exposure Policies

Exposure (Single Buyer) Policy - for covering the risks on a specified buyer.

Exposure (Multi Buyer) Policy - for covering the risks on all buyers.

IT-Enabled Services (Specific Customer) Policies The contract would be for providing certain service during a defined period. Billing would be for the service rendered during a pre-determined interval – a week, fortnight or month. Where there is a non-payment problem, there can be certain services invoiced. There can be cases where there is no physical documentation. The contract could also provide for detection of mistakes or errors while rendering the service and procedure for correction.

IT-Enabled Services (Specific Customer) Policies

The contract would be for providing certain service during a defined period.

Billing would be for the service rendered during a pre-determined interval – a week, fortnight or month.

Where there is a non-payment problem, there can be certain services invoiced.

There can be cases where there is no physical documentation.

The contract could also provide for detection of mistakes or errors while rendering the service and procedure for correction.

Insurance Cover for Buyer's Credit and Line of Credit Packing Credit Guarantee Export Production Finance Guarantee Post Shipment Credit Guarantee Export Finance Guarantee Export Performance Guarantee Export Finance (Overseas Lending) Guarantee

Insurance Cover for Buyer's Credit and Line of Credit

Packing Credit Guarantee

Export Production Finance Guarantee

Post Shipment Credit Guarantee

Export Finance Guarantee

Export Performance Guarantee

Export Finance (Overseas Lending) Guarantee

Maturity Factoring Option to give easier credit terms to overseas customers. Enables to offer more friendly delivery terms. Reduced foreign bank handling charges on documents. Substantial cost savings relating to monitoring and follow up (telephones, faxes, follow-up visits) of receivables, overdue bank interest on delayed collections. Increase in export sales, due to more competitive terms offered to customers. Better security than even Letters of Credit. Elimination of uncertainties relating to realisation of accounts receivables resulting in better cash management to meet working capital requirements. Full attention to procurement/production, marketing and sales and growth of business, due to freedom from chasing receivables.

Maturity Factoring

Option to give easier credit terms to overseas customers.

Enables to offer more friendly delivery terms.

Reduced foreign bank handling charges on documents.

Substantial cost savings relating to monitoring and follow up (telephones, faxes, follow-up visits) of receivables, overdue bank interest on delayed collections.

Increase in export sales, due to more competitive terms offered to customers.

Better security than even Letters of Credit.

Elimination of uncertainties relating to realisation of accounts receivables resulting in better cash management to meet working capital requirements.

Full attention to procurement/production, marketing and sales and growth of business, due to freedom from chasing receivables.

Procedure Seek setting up of the facility by forwarding a formal application to the nearest office of ECGC, through the exporter's bank. Furnish full information with regard to business, including information on overseas customers. Get pre-approval by ECGC for the purpose and have a 'Permitted Limit' (PL) established on each one of the overseas customers. Enter into a Factoring Agreement with ECGC and offer to ECGC for factoring. Approach exporter's bank for arranging advances on such factored receivables. Ensure due performance of obligations to the buyer under export contract/purchase order.

Procedure

Seek setting up of the facility by forwarding a formal application to the nearest office of ECGC, through the exporter's bank.

Furnish full information with regard to business, including information on overseas customers.

Get pre-approval by ECGC for the purpose and have a 'Permitted Limit' (PL) established on each one of the overseas customers.

Enter into a Factoring Agreement with ECGC and offer to ECGC for factoring.

Approach exporter's bank for arranging advances on such factored receivables.

Ensure due performance of obligations to the buyer under export contract/purchase order.

Special Schemes Transfer Guarantee Overseas Investment Insurance Exchange Fluctuations Risk Cover Constructions Work Policy Specific Policy for Supply Contract

Special Schemes

Transfer Guarantee

Overseas Investment Insurance

Exchange Fluctuations Risk Cover

Constructions Work Policy

Specific Policy for Supply Contract

Transit Risks Standard risks of transport like "perils of the seas" meaning fortuitous accidents or casualties of the seas. Exceptional risks of transport like war, strikes, and terrorism etc. Some of the risks listed are: Stranding, Grounding, Sinking or Capsising Overturning or Derailment of Land Conveyance Discharge of Cargo at Port of Distress Fire or Explosion Malicious Damage Theft/Pilferage Washing Overboard (deck cargo) War Risks Breakage Scratching, Chipping, Denting and Bruising Non-Delivery

Transit Risks

Standard risks of transport like "perils of the seas" meaning fortuitous accidents or casualties of the seas.

Exceptional risks of transport like war, strikes, and terrorism etc.

Some of the risks listed are:

Stranding, Grounding, Sinking or Capsising

Overturning or Derailment of Land Conveyance

Discharge of Cargo at Port of Distress

Fire or Explosion

Malicious Damage

Theft/Pilferage

Washing Overboard (deck cargo)

War Risks

Breakage

Scratching, Chipping, Denting and Bruising

Non-Delivery

Method of Claim under Marine Policies Take immediate steps to minimise loss. Inform the nearest office of the insurance company or claim settling agent mentioned on the policy. In case of damage to goods whilst on ship or port, arrange for joint ship survey or port survey. Lodge monetary claim with carrier within stipulated time period. Submit duly assigned insurance policy/certificate along with the original invoice and other documents required to substantiate the claim such as: Bill of Lading/AWB/GR Packing list Copies of correspondence exchanged with carriers. Copy of notice served on carriers along with acknowledgement/receipt. Shortage/Damage Certificate issued by carriers. The survey fee is to be paid to the surveyor appointed by the insurance company. This fee will be reimbursed along with the claim if the claim is otherwise admissible.

Method of Claim under Marine Policies

Take immediate steps to minimise loss.

Inform the nearest office of the insurance company or claim settling agent mentioned on the policy.

In case of damage to goods whilst on ship or port, arrange for joint ship survey or port survey.

Lodge monetary claim with carrier within stipulated time period.

Submit duly assigned insurance policy/certificate along with the original invoice and other documents required to substantiate the claim such as:

Bill of Lading/AWB/GR

Packing list

Copies of correspondence exchanged with carriers.

Copy of notice served on carriers along with acknowledgement/receipt.

Shortage/Damage Certificate issued by carriers.

The survey fee is to be paid to the surveyor appointed by the insurance company. This fee will be reimbursed along with the claim if the claim is otherwise admissible.

Exchange Rate Fluctuation Risks Spot Rates Forward Rates Option Dated Forward Contract Foreign Currency Options Currency Swaps

Exchange Rate Fluctuation Risks

Spot Rates

Forward Rates

Option Dated Forward Contract

Foreign Currency Options

Currency Swaps