In the arena of international trade, every transaction is accompanied by a multitude of risks. The remoteness of trading partners, political instability in certain regions, currency volatility and the potential insolvency of debtors are major obstacles for exporting companies. These uncertainties can turn a promising business opportunity into a financial nightmare. Export credit insurance has emerged as the answer to these challenges.
Credit insurance organisations in comparative law
The global overview of credit insurance organisations reveals two dominant models.
The first model involves countries where a single institution manages both the financing and the guarantee of export transactions. In the United States, the Eximbank (Export-Import Bank of the United States) is a perfect example of this integrated approach. The United Kingdom has opted for the ECGD (Export Credit Guarantee Department), Canada for EDC (Export Development Canada) and Australia for EFIC (Export Finance and Insurance Corporation).
The second model includes countries with specialised bodies that issue credit insurance on behalf of the State. Germany relies on the Hermes-Treuearbeit consortium, Belgium on the Office National du Ducroire (OND), Spain on CESCE (Compania Espanola de Seguros de Crédito a la exportacion) and Italy on SACE (Sezione speciale per l'Assicurazione del Credito all'Esportazione).
This structural difference is not insignificant. It reflects national strategic choices and different administrative traditions.
The French system and the role of COFACE
France is part of the second model, with the Compagnie Française d'Assurance pour le Commerce Extérieur (COFACE) as the central player. This institution issues insurance policies on behalf of the French State.
The decision to grant a guarantee rests with the Director of External Economic Relations (DREE), after consultation with the Commission des garanties et du crédit au commerce extérieur, as specified in article L.432-3 of the French Insurance Code.
The distinctive feature of the French system is its collegiate approach. The "Guarantee Commission" brings together several ministries to examine applications for cover. This inter-ministerial approach means that not only the financial aspects, but also the diplomatic and strategic implications of export operations can be assessed.
Medium and long-term credit insurance
Types of policies and risks covered
COFACE offers individual policies to exporters (for supplier credit) and banks (for buyer credit). These policies cover four categories of risk:
- Commercial risk: financial default by the buyer
- Strict political risk: confiscation, nationalisation, embargo
- Non-transfer risk: inability to repatriate funds
- Catastrophic risk: wars, revolutions, natural disasters
For buyer credit, COFACE offers "PR" policies for private borrowers and "SP" policies for public borrowers. This distinction enables cover to be tailored to the legal nature of the debtor and the specific risks involved.
Guaranteed quotas by transaction
COFACE never covers 100% of the risks, unlike some foreign organisations such as the American Eximbank. This "co-payment" policy is designed to make economic operators more responsible.
Quotas guaranteed vary according to the type of transaction:
- For buyer credits with public financial support: maximum 95%
- For accompanying financial credits: 90% maximum
- For supplier credits exposed to political risks: 90%
- 85% (90% if the receivable is covered by a bank guarantee).
A A notable exception is the financing of Airbus aircraft. In this particular case, COFACE can issue a guarantee to 100%, together with the German credit insurer Euler Hermès and the UK's ECGD.
But figures don't tell the whole story. Exporters need to understand that these uncovered percentages represent a real risk to their cash flow.
Supplementary policies and specific risks
International trade generates risks specific to each phase of an export operation. COFACE has developed additional policies to meet these needs.
During the manufacturing period, the exporter may see the operation fail if the buyer does not pay the scheduled instalments or if the buyer credit does not come into effect. A specific policy covers this risk of interruption.
Another risk is currency risk. Between the quotation and the conclusion of the contract, currency fluctuations can drastically reduce the profitability of a transaction. COFACE manages policies to protect against these unpredictable fluctuations.
Banks are not left out. In the case of buyer credit without stabilisation, they are subject to an interest rate risk between the credit offer and the signing of the contract. COFACE can cover this risk by offsetting the difference between the refinancing cost at the date of the offer and at the date of signature.
These additional policies are not superfluous options. They meet concrete needs and can save an exporting company from financial disaster.
Practical considerations for exporters
Export credit insurance is not just a financial product. It is a strategic tool that deserves a proactive approach.
Exporters need to anticipate their cover requirements right from the prospecting phase. A late request can compromise the whole operation.
Risk assessment requires in-depth knowledge of the importing country. The OECD's classification of countries into eight risk categories has a direct impact on insurance premiums. A well-informed exporter incorporates this parameter into his profitability calculations.
Contractual negotiations with foreign buyers must include payment clauses that are compatible with the requirements of credit insurers. A poorly drafted payment clause may disqualify the transaction from certain types of cover.
And finally.., the european dimension should not be overlooked. Directive 84/568 of 27 November 1984 encourages cooperation between European credit insurers for operations involving subcontractors from other member countries.
The complexity of these mechanisms justifies a specialised legal support. Analysing contracts, structuring transactions and negotiating insurance policies requires expertise that only a specialist lawyer can provide.
Our firm helps exporters navigate this regulatory jungle. Contact us before you start exporting. We'll turn these constraints into opportunities for your international development.
Sources
- Insurance Code, Article L.432-3 on the Commission des garanties et du crédit au commerce extérieur (Guarantees and Foreign Trade Credit Commission)
- G. Barral, Export credit insuranceNathan, 1987
- Mr Noinville, COFACEDunod, 1993
- G. Bourdeaux, International buyer credit. A French and comparative approachEconomica, 1995
- OECD Arrangement on Officially Supported Export Credits (latest version entered into force on 1 July 2007)
- European Directive 84/568 of 27 November 1984 on cooperation between European credit insurers
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