Trade Credit Insurance: Wake up Call for All Exporters

Trade Credit Insurance (TCI) is a risk management tool for both domestic companies and exporters alike in dealing with non-payment or default of a trading counterparty. Essentially, it is an insurance against commercial and political risks when dealing with new partners overseas. Up until the last couple of years most Thai exporters have never really used TCI because they have been relying on Letters of Credit (L/C) from their buyers. However, due to the increasing competition from India and China, who are now members of the World Trade Organization (WTO), exporters from these two countries have been willing to sell their merchandise without requiring L/C from their buyers. The technical term for this kind of practice is called "Open Account" or O/A for short. This has put many Thai exporters in a difficult spot because L/C can be quite expensive and if the buyers can get away without it they will do so, particularly from sellers with more or less than same quality products.

Types of Risks

Essentially there are two main types of risks that can be insured against:

Commercial Risks:
o Insolvency
o Protracted Default

Sogo Department Store and K-Mart are household names and who would have thought that such big companies can go bankrupt. In fact many exporters from Thailand have been caught off guard from the insolvency of these two giants. The lessons that can be learned from this sad episode is that commercial risks are not confined to just trading counterparts in Africa or Middle Eastern countries, they are just as great against large and well known companies in developed countries. Apart from outright bankruptcy, the other major commercial risk is when the seller has money but refuses to pay. The technical term for this is "protracted default" and I am sure many Thai exporters to the Middle East and India are well aware of this risk!

Political Risks:
o Government Moratorium
o Non Transfer Risks
o Cancellation of Export License
o Occurance of war or revolution

Political risks are a bit more difficult to forecast and usually when they happen it's with lightning speed. Several well connected bankers were caught off guard when Russia and Argentina defaulted on their foreign debts. Malaysia imposed remittance ban on the Ringgit during the Asian Crisis in 1997 and the list goes on. Closer to home is the import ban of uncooked chickens from Thailand. All of these events are very unpredictable but can be devastating to those affected. Just look at the share price of GFPT and CPF! At the time of writing the SET Index has already shed more than 100 points from this year's peak. Moreover, political risks can and often occur more than once. The rebuilding of Iraq is a case in point. Although, war in Iraq has been officially declared "over" but the situation is still very dicey. Therefore, all those Thai companies, particularly rice, garment and cement exporters that are hoping to cash in on the rebuilding of Iraq will be well advised to take out a TCI.

Claim Payment In the event of an outright bankruptcy, payment is usually made within one month and if the amount involved is less than Baht 100,000 it would take about 2 months. But for protracted default, it will take about 5 months

Insurance Premium The biggest players in this niche market are Samaggi Insurance, Phatra Insurance and AXA Insurance and the biggest one of all is not even an insurance company but a bank; Exim Bank (export/import bank) which was set up under a special charter that can offer limited insurance services. Insurance premium really depends on several factors but usually falls within 0.1% to 2.5% of insurable turnover. This fee will cover the cost of feasibility studies and legal expenses in claims and follow up. Exim Bank is quite popular with many Thai exporters because they can pick an choose which tranch of export to insure but with the other insurance companies, anti-selection is usually not allowed.

Interested Parties Those of you that are interested in finding out more about TCI and get in touch with Khun Tadthep at 02-955-0100-29, e-mail: tathep@samaggi.co.th or visit www.samaggi.co.th Interestingly enough, TCI can also be used by local businesses such as cheque discounting and factoring. As mentioned several times before in this column, an insurance cover is something you buy but hope not to use and TCI is no exception. In fact several banks are beginning to view TCI as prerequisite in granting a packing credit. As for serious enquirers, you should prepare the following documents before seeing your insurance companies: annual report, financial statements going back 3 years, types of business and country of export and record of bad debt.