Development of exports is one of the main tasks to be fulfilled in the economy in Russia. The strategic partners of Russian exporters – foreign purchasers – normally use a scheme in which goods are supplied on credit. Therefore, it is about time for our country to develop a system for insuring such credits in which, if the recipient of the goods does not pay for them on time, an insurance company compensates the supplier for the loss. By reducing risks, such a system would promote the development of Russia’s foreign trade.
Export insurance is basically divided into two main categories: insurance against commercial risks and insurance against political risks.
Insurance of export contracts is quite pertinent nowadays. According to available statistics, even in such industrially developed countries as France and Germany, 25,000 to 40,000 companies go bankrupt every year. In Germany, the amount of defaulted contracts is running as high as DM 20 billion to DM 30 billion and there have been numerous incidents of companies losing more than DM 1 million in a moment due to bankruptcy on the part of their partner or partners.
Some 3-4 years ago there existed a common belief among Russian exporters that foreign companies are 100 percent reliable by definition and cannot cause them any problems. The word "foreign" was almost a synonym for "highest reliability." In due course, the myth was exploded.
It would be incorrect to say that political risk insurance is unnecessary when dealing with European countries: Incidents of license cancellation and the imposition of embargoes and quotas are not too rare. However, in most cases insurance against political risks is applied to the emerging markets. There are two variants of such insurance: against default of state-run companies and against default of private companies.
The latter kind of insurance includes situations in which a private buyer is able and willing to pay but cannot do so due to circumstances caused by government, such as confiscation or nationalization of property, deprivation of import license or refusal to extend it, imposition of embargoes, moratoriums and currency-conversion limitations as well as civil wars and public disorders.
The business of insuring export contracts involves a very high risk that is difficult to assess and hence requires both a high level of professionalism and substantial working capital.
Therefore, in most of the insurance companies specializing in this business the state owns either 100 percent or a controlling share of stock that permits to cover losses at the expense of state budget.
Yet 10 years ago it was commonly believed that political risks are not subject to insurance by way of trade, but now a number of major Western companies dare to insure against such risks as confiscation and nationalization by as much as $700 million, and the share of income generated by this kind of insurance is rapidly growing.
The international insurance companies maintain huge databases and confidential dossiers on all companies involved in foreign trade throughout the world. The databases of the largest insurance companies contain information on more than 20 million companies. According to insiders, the maintenance of such a database can cost as much as $40 million a year. Of course, far from every company can afford to maintain such a database and those who cannot resolve the problem by establishing partnership relations with the market’s leaders.
Insurance is by no means the only way of reducing risks in supplying goods on credit terms. In Russia, for example, a widespread practice is to attract special services, while in the developed countries of the world there are credit bureaus specializing in the collection of corporate intelligence.
But such organizations cannot help resolve the main problem of exporters because all they can provide are ratings of various sorts, intelligence reports and recommendations. They do not bear any obligations and, therefore, in the case of your partner’s default, you will have nobody to file claims against.
What an insurer sells you is a policy – a binding financial document which entitles the bearer to receive compensation in the case of partner default. Even banks do not have such extensive opportunities for getting information on importers as do insurers and their services are very cheap. For example, a credibility assessment normally costs only $100. Depending on the results of the assessment, an insurance company will determine a limit of responsibility and an insurance rate. For export contracts, insurance rates usually vary between several tenths of a percent to 1.5 percent. Of course, the rate depends not only on the importer’s reliability but also on the exporter’s turnover. The higher the turnover, the lower the rate.
The insurance business is an important factor in economic stability. It is thanks to insurers that the large number of bankruptcies that occur even in the most-developed countries of the world every year do not result in any catastrophic consequences.
Unlike in other kinds of insurance, such as property or freight insurance, where agents are hunting for clients, the situation in the business of export insurance is different: Clients are standing in lines to get their contracts insured. The reasons lie in the high risks and high start-up costs of running the business. Export insurance becomes profitable only when the business is run on a large scale and is widely diversified by region and industry. As things stand today, some 25 percent of the total number of export contracts made throughout the world are insured and the combined liability of the insurers in this sphere of business totals approximately $1.2 trillion.
Russia’s exports currently total $50-60 billion, which is an order of magnitude less than those of the United States and the industrially developed countries of Europe. Hence, opportunities for the development of the export insurance business in this country are much fewer. However, though meager by Western standards, these opportunities are quite high by Russian ones. Suffice it to say that not more than 0.2 percent of Russia’s export contracts are getting insured today.
Most of the demand for export insurance in Russia comes from exporters to such traditional partner countries as Germany, India, Hungary, Finland and Poland. Industry breakdown tends to shift from sophisticated items to raw materials, metals, foodstuffs and even jewelry, though the latter two categories have been rare so far.
The largest and almost the only company offering insurance of export contracts in Russia is Ingosstrakh. Its Austrian affiliate, Garant, issued its first policies of that kind as far back as 40 years ago. In the head office of Ingosstrakh, a department of export insurance was established in 1988. It chose to develop its business on the basis of partnership with leading foreign companies and maintains re-insurance agreements with insurance companies in Great Britain, Germany and France. Ingosstrakh currently provides insurance policies for exports to 116 countries.
Ingosstrakh’s potential in the business is very high and is used only to a very small proportion. In reality, the capacity of the market for Russian export insurance may be as high as $15 billion. As things stand today, the combined total of export-insurance policies in Russia is approximately $100 million, nearly equally divided between the political and commercial risk insurance.
Usually, policies are around $1.5 million to $2 million and the biggest deal made by Ingosstrakh was $17 million. The demand does exist, including from those exporters who work with small foreign companies. It must be noted that policies under $20,000 are unprofitable for insurers because the commission is comparable with the cost of the partner’s reliability check.
In the second half of this year Ingosstrakh plans to expand its list of services by adding one more — expedite assessment of foreign partners. With help from its German partners, Ingosstrakh is preparing to get connected to an electronic database that will allow it to obtain information about a company’s credibility to a limit of DM 1 million within one to two days.
Top 20 in terms of foreign trade geography
|No.||No. in the Top 100 list||Company (enterprise)||Number of importer-countries in 2000|
|2||28||Ilim Pulp Enterprise*||81|
|3||14||Novolipetsk Metallurgical Combine||71|
|6||16||Magnitogorsk Metallurgical Combine||67|
|8||65||Segezh Paper and Pulp Combine||55|
|14||81||Uralmash-Izhora Machine Building Group*||36|
|19||42||VSMPO (Verkhnesaldinsk Metallurgical Conglomerate)*||33|
|20||32||Oskol Electro-metallurgical Combine||33|