Why was it important for Eximbank to strengthen the insurance division this year?
Michal Demák, Director of the Non-Tradable Risk Insurance Department of EXIMBANKA SR: The legislator’s intention was to provide Slovak exporters with what other countries also have. This means that we have a banking part, i.e. a credit part, as well as an insurance part, while both business activities are governed by OECD rules and regulations. It is also important that the insurance division is divided into two branches – insurance of tradable and non-tradable risk.
What do you see as the significance of this division?
Martin Schaner, Director of the Tradable Risk Insurance Department, EXIMBANKA SR: It is more comprehensible for our clients, although our business sometimes overlaps. A typical example is insurance of production risk, where we insure the classic insurance of short-term receivables and our colleagues from the other department add non-tradable insurance, namely insurance of production risk.
Can you give an example?
M. D.: Yes. Let’s say a company wants to produce some goods, for example a machine. It already knows who it wants to sell it to. And it wants to insure its customers from the European Union, the OECD or even from third countries in case they do not take the equipment for any reason. In this case, we are talking about non-marketable production risk insurance.
When will it be insurance for non-marketable risk?
M. SCH.: At the moment when the customer removes the machine, the supplier incurs an additional risk arising from the supplier’s credit. At that point, the insurance of the marketable risk kicks in. So we insure the company for a real receivable that has been invoiced on a deferred basis.
What is the basic difference between the two types of insurance?
M. D.: Under non-marketable risk insurance, we insure both commercial and political risk.
M. SCH.
M. D.: The difference is that with us the political risk is, for example, war, whereas with my colleague the government of the customer’s country announces that not a single euro will leave the country from the next day.
M. SCH.: Coming back to the insurance of marketable risk, every company at some point reaches a point where it needs to insure its receivables. It gains a competitive advantage by being able to offer longer maturities to its customers. At this point, the question of whether the customer will actually pay comes to the fore. This is where the insurer comes in, to assess whether the customer is creditworthy, has a smooth history, how long it has been on the market, or what its management is like. Based on this, it decides whether or not to grant the buyer an insurance limit. The Slovak exporter then has important information and, consequently, the certainty that he will be paid.
What types of business are most often insured under both risks?
M. D.: In terms of non-negotiable risk, our most important product is the so-called buyers credit, where the bank grants a credit to the buyer, for example in Senegal, and we insure this credit. And the crème de la crème product is the insurance of investments abroad. Here again, the bank provides credit for part of the investment abroad and we insure part of the risks.
M. SCH.: In trade receivables insurance, the most frequently insured risks are recurring deliveries with invoice maturities of up to 90 days.
Can you tell us, for example, when insurance has saved a company from losses?
M. SCH.: A Slovak export-oriented company sold its products, specifically electrical components, to a major foreign customer in Germany. The delivery was worth one million euros. The company traded regularly with this customer, and so far had no problems with payments from the German customer. Therefore, the delivery was made with a 90-day invoice due date. Shortly after the delivery of the components, the company ran into financial difficulties in Germany and was declared bankrupt.
How was this eventually resolved?
M. SCH.: The Slovak exporter had an insurance limit of one million euros issued for its customer, so the receivables were insured and the insurance company paid the insurance claim due to insolvency. As the deductible was set at 10 per cent, the amount of the insurance claim paid by the insurer amounted to 900 thousand euros. By insuring the company, it avoided significant financial losses that could otherwise have threatened its liquidity, stability, cash flow and, last but not least, profitability. If the Slovak company had not insured its German customer or its receivables from him, it would most likely not have received its money from the customer.
How has the risk insurance situation evolved and what is the situation now?
M. D.: A lot has been influenced by recent and current geopolitical developments – wars and conflicts that bring uncertainty to international trade. Companies are realising that they need to protect themselves. They used to say – why am I going to insure a customer? I’ve known him for 20 years. That is no longer the case. Even your best friend can fail to pay. And not because they don’t want to. The situation simply won’t allow it. That’s why export credit insurance is extremely convenient and necessary today.
Read more HERE