Export credit insurance: what the policy actually pays when a buyer defaults

The claim was valid. The money arrived five months later.

A Houston equipment distributor sells to a retail chain in Monterrey on 90-day terms and insures its receivables under a whole-turnover credit insurance policy. When the chain stops paying, the balance stands at $310,000. The insurer pays $225,000 — in the sixth month after the due date. Nothing went wrong with the claim. The buyer’s limit was $250,000, the insured percentage 90%, the waiting period 150 days. All three sat in the policy schedule; nobody in finance had looked at them since renewal.

Export credit insurance protects a seller against a foreign buyer’s failure to pay. What it actually pays is set by three numbers — the buyer limit, the insured percentage and the waiting period — and by a short list of dated duties whose breach can void cover. This guide walks through each, with worked numbers from US, UK and Indian trade.

The limit is the cover, not the policy

The policy sets the rules; the credit limit sets the amount. For each buyer, the insurer approves a maximum insured exposure after reviewing its credit. Ship beyond it and you carry the excess yourself, whatever the policy wording says about covering “all sales”. The three groups that dominate the global market — Allianz Trade, Coface and Atradius — all work this way, as do most national insurers.

Most whole-turnover policies also include a discretionary limit: a small amount, often in the tens of thousands of dollars, that you can grant yourself on a new buyer on the strength of trade references or your own payment history with them. It is convenient, and it is where many uninsured balances quietly start, because the conditions attached to it are rarely re-read.

Limits can be cut or cancelled at any time for future shipments. Goods already shipped generally stay covered under the old limit; anything after the notice is covered only within the new one. A limit reduction is often the first warning you will get about a buyer — and one of the more useful things the premium buys.

Premium ranges are market estimates and move with sector, buyer country, loss history and credit terms. Whole-turnover pricing depends on declaring every buyer, including the safe ones; leaving out a blue-chip customer to save premium is a breach that can reduce a later claim.

From overdue to paid: the claims clock

A loss arises in one of two ways. Insolvency — the buyer enters a formal proceeding — lets you claim fairly soon after the debt is lodged. Protracted default, by far the more common export case, means waiting out the policy’s waiting period, typically 150 to 180 days from the original due date in private policies, before the claim can be paid. Settlement then follows within a contractual window, often 30 days.

Two deadlines run in the meantime. The notification of overdue account must reach the insurer within a period counted from the due date — commonly 30 to 90 days. Missing it is the classic way to lose a valid claim, and it usually happens to the exporter who wanted to agree a payment plan before “reporting” a long-standing customer. The second is the maximum extension period: past a certain number of days overdue, you may not keep shipping on credit or extend terms without consent.

And, as with export factoring, a disputed debt is parked. If the buyer rejects the goods or the quantity, the insurer waits until the dispute is settled by agreement or judgment. Credit insurance covers inability to pay, not a reasoned refusal.

Private market or export credit agency

In the United States, EXIM Bank offers short-term multi-buyer and single-buyer policies, with typical cover of 90–95% depending on the product. Its charter (12 U.S.C. § 635) directs it to supplement and encourage private capital rather than compete with it, so it earns its keep where private appetite is thin: small exporters, riskier markets, political risk. In the UK, UK Export Finance — founded in 1919 as the world’s first export credit agency — steps in where private cover is not available, notably through its Export Insurance Policy for single contracts. In India, ECGC Ltd, government-owned, covers both commercial and political risk under its standard shipments policies and also insures the banks that finance exporters, which can lower the cost of credit.

Above two years of credit, all three follow the OECD Arrangement on Officially Supported Export Credits: a minimum 15% down payment and minimum premiums tied to a 0–7 country risk classification. Political risk — currency inconvertibility, transfer delay, war, import bans — is standard in agency cover and usually an option in private short-term policies. Where hard currency is rationed, it is the cover that matters: a solvent buyer can pay locally and the dollars still never arrive.

Three worked examples

Premiums, limits and deadlines below are working assumptions, not quotes.

1 — Over the limit, Texas to Mexico. Whole-turnover policy on $8,000,000 of insured sales at 0.2%: $16,000 a year. Limit on the Monterrey chain: $250,000, at 90%. Balance at default: $310,000. Claim: 90% × $250,000 = $225,000, paid after the 150-day wait. Net loss: $85,000 — $60,000 shipped above the limit plus $25,000 of uninsured retention. A limit increase request before the last two shipments would either have covered the gap or flagged the insurer’s refusal in time.

2 — The late notice, UK to Ireland. A Leeds textile supplier is owed £140,000 by a Dublin retailer, due 30 June, under a policy with a 60-day overdue notification window (assumed). The supplier agrees an informal instalment plan and notifies on day 75. The insurer declines the debt. Notified on time, the claim would have been worth 90% × £140,000 = £126,000; the goodwill gesture cost the full amount.

3 — Transfer delay, India to Egypt. A Ludhiana engineering exporter invoices $200,000 — about ₹1.76 crore at an assumed ₹88 per dollar — to a Cairo buyer, insured under a comprehensive-risks policy. The buyer deposits Egyptian pounds on the due date, but the dollars are not released. Because the policy includes transfer delay, the exporter is paid 90% after the waiting period: $180,000. Under a commercial-only policy there would have been no claim at all: the buyer was neither insolvent nor in default.

Reading the policy before the first overdue

Four habits turn the policy into a control tool. Compare each buyer’s actual exposure with its limit every month. Put the overdue-notification deadline in the receivables calendar, counted from the due date, not from the last reminder. Confirm political risk is covered for any market where hard currency is scarce. And if the receivable will be financed, assign the policy proceeds to the bank or factor through a loss-payee endorsement: insured receivables usually borrow at a lower margin.

Credit insurance complements, rather than replaces, a letter of credit on a fragile buyer — one secures a single shipment, the other a portfolio. Either way, the premium belongs in the cost of the sale.