Build Export Success - Managing Your Risks

Managing Your Risks

Insuring Risk

Risk is part of life for any business, including exporting. Risks exist even though you are prudent in what you have contracted to undertake. Some risks are beyond your control. Fortunately, it is possible to take out insurance to cover many contingencies. You can, for instance take insurance precautions against:

non-payment by the customer
product liability
theft
damage
war

Not all customers and countries can be covered in this way. If coverage is not easily available, you may want to think twice about doing business there.

Insurance for protection against risks of loss by exporters of goods or services are, in general, broken into two basic categories: political and general/commercial.

Risk begins once the contract comes into effect (if not before) and continues until payment is complete. As a result, exporters should investigate the types and costs of insurance required and desired should commence at the initial stages of transaction negotiations.

Political Risk

Insurance against many political risks can be arranged from either the federal Export Development Corporation (EDC) or from a number of private commercial insurers and your licensed insurance broker. While the products available from each often compete in coverage and cost, they also complement each other.

General/ Commercial Insurance

These coverages are associated with the usual risks of doing business and are available from private commercial insurance companies and your licensed broker. Be aware that not all brokers have had the opportunity of exposure and therefore many lack experience in the peculiarities of insurance relating to foreign application and the export trade. The extent of coverage is often dictated by the terms of sale.

The following are examples of the types of coverage available:

1. Credits Insurance

Export receivables are subject not only to the political risk in the customer's country but also the commercial risk of the foreign customer, i.e., its ability to pay. Most firms find managing the commercial risk more difficult than with domestic receivables because of the lack of adequate credit information and the long distances between the supplier and customer.

Losses due to contract cancellation, customer insolvency, repudiation or simply default (refusal of the customer to pay an invoice when due), can have a disastrous impact on your cash flow and your ability to finance operations.

Coverage is available from private insurers and Export Development Canada (EDC), Canada's official export credits agency.

2. Transportation/ Marine Cargo

This insurance covers the loss or damage to goods during transit by land, sea or air and incidental associated storage periods. This coverage may include:

Direct Damage/Property
Third Party (General) Liability
Surety/Performance Bonds
Product Liability

3. Travel Insurance

This coverage needs to include trip cancellation (if a restricted air fare), travel of family members to care for personnel ill abroad, return of the body in case of death abroad, etc. Such coverage, up to specified limits, is often required as part of major contracts.

4. Professional Liability

Professional liability insurance is especially important in markets like the United States where legal action is very common. At a minimum, such insurance can cover the cost of legal fees for responding to an action that has been filed against your firm. There are three other areas of exposure addressed by professional liability insurance:

alleged non-performance
problems resulting from implementing your recommendations
non-performance by third parties who were your subcontractors

At present, it is difficult to get "global" coverage and market-by-market coverage can be costly.