Learn something new every day
More Info... by email
International credit insurance is a type of insurance policy designed for corporations and businesses that engage in financial transactions with customers or other businesses located abroad. Most companies hold insurance policies protecting their assets domestically, but these don't normally cover transactions spanning different countries. Internationally-focused policies are usually designed first and foremost to protect trade and export, but broader financial transactions and asset swaps are sometimes included as well. As a general rule this sort of insurance tends to have higher rates than domestic policies, and premiums are usually set after an assessment of the involved entities’ solvency, transactional history, and location. War-torn countries or nations with political instability often trigger higher rates out of a perceived higher risk of non-payment. International insurance is generally more difficult to formulate for the underwriter as well because the risks inherently found in countries, currencies, and cultures must be carefully assessed before an international credit insurance policy can be issued. Determining the appropriate level of risk generally requires considering all three factors simultaneously.
Credit insurance generally covers instances when one entity, usually a business loans money or makes payments to another with the expectation of some sort of compensation, exchange, or remuneration. Insurance isn’t usually needed for small transactions, but when large sums of money are involved it can do a lot in terms of protecting creditors’ assets.
There are several different types of credit insurance, usually tailored to the specific needs of the party or parties taking out the policy. In international settings, policies typically apply to international business transactions. This can be as simple as a trade arrangement with a foreign subsidiary, or as complicated as a new capital investment abroad. International policies are usually administered not by banks but rather by professional accounting or auditing firms, most of which are accredited through the Swiss-based International Credit Insurance and Surety Association (ICISA).
Credit insurance most commonly covers payment risks that result from trading or making sales exchanges on credit with buyers. The coverage is called export credit insurance if only exports are insured. The vast majority of policies cover trade as it pertains to sales, purchases, and exports. Specifics of what’s covered and at what cost tend to vary based on the specifics of the parties, as well as their location, and most of the time policies are subject to renewal and reassessment periodically — often annually or bi-annually.
One of the things that makes international credit so unique and so much more complicated is the increased range of things that could go wrong. Most of the time, policies and premiums are devised at least in part on the perceived risk of default. In many international settings, default can happen for more than simply one party’s insolvency. Riots, wars, political strife, and other changes may affect whether or not payment can be expected. Foreign credit insurance policies guards against these types of financial risks.
Some of the more substantial risks are those of increasing global competition and nationalistic governmental policies. Governments tend to mandate policies that self-serve, such as import tariffs; however, this many discourage global trade. Risk assessments are generally carried out to include these factors in the final coverage.
At one point, political risk coverage was generally acquired only through specialized government programs. This resulted in a need for the customer to obtain two separate and distinct international credit insurance policies, which complicated accounting as well as the filing and handling of claims. Having separate policies for trade and export usually required additional administration and awareness of differences in the conditions and requirements set by each policy. Dual coverage today is typically offered by private insurers rather than governmental agencies, though, as with most things, there can be exceptions.
One of our editors will review your suggestion and make changes if warranted. Note that depending on the number of suggestions we receive, this can take anywhere from a few hours to a few days. Thank you for helping to improve wiseGEEK!