Shippers should review the value of cargo insured and limit reckless trade exposure in this uncertain economic environment.
BY: MARY MACKINVEN
The rate of company insolvencies has steeply increased in nearly all markets and greater caution is required before goods are despatched or services are provided, warns managing director of Atradius Credit Insurance for Australia and New Zealand, David Huey.
“Finance support and insurance cover are important pieces of the transaction but the exporter needs to be diligent even with these facilities in place.”
His insurance tips in these times are:
- Review terms of trade to make sure they are relevant and not extending the risk date out unnecessarily. While open credit terms are designed to facilitate trade, they should not be exposing the exporter to more risk than necessary.
- Contracts should be reviewed to ensure terms are clear and the possibility of disputes minimised.
- Different countries can have wildly different responses to the global financial crisis. Gather as much information on target countries and individual customers as you can before agreeing to terms. Trading history is no longer a strong enough reason on its own to offer open terms.
- Credit insurance should be used as a back up, not a reason to trade recklessly. Information about the markets you are dealing with is critical and a credit insurer provides valuable market intelligence when approving or denying limits. Make good use of all resources available to avoid loss through non-payment.
The global credit crisis is over and the economy is now in recession/depression, according to Vero Marine underwriting and risk manager John McKelvie. This has to be good news for cargo insurers, but there are still warnings to heed.
CARRIER RISK
There is a greater risk of carrier bankruptcy, so an exporter needs to be on the ball with perishable product to move it on to market at additional cost on another carrier. Delay is not usually an insured risk. Ship values have decreased and thereby increased the proportion of salvage and general average costs allocated to cargo insurers.
“This is likely to continue for at least the next 18 months,” says McKelvie. “Exporters who charter vessels present a greater general average and salvage risk as theirs is often the only cargo on board.”
SHIFT IN CARGO VALUE
Shipping companies have cut the number of vessels on their scheduled services so more containers will be loaded into vessels.
“Therefore per vessel [insurance] limits need to be re-examined. Cargo policy limits may have been set when the exchange rate was around NZ$1 to US80c, whereas now it might be US65c. For example, a shipment might have risen in value from NZ$937,500 to NZ$1,154,000. should the policy have a per vessel limit of NZ$1m and there was a total loss … watch those limits,” McKelvie says.
Costs have certainly increased in the area of trade credit insurance, due to the economic environment, increased claims activity and pressure from re-insurers. Premiums have increased a minimum of 40% at all insurers, says Mike Kayes, QBE Insurance trade credit manager for New Zealand. Kayes says prices will keep increasing but he’s expecting stabilization through 2010.
Claims are more frequent overall, and particularly in the wool industry that QBE Insurance recently exited altogether.
Kayes says even fruit and vegetable exports have suffered payment hiccups, despite terms of trade being in place. “The importer says ‘the market has shifted and I can’t pay you anymore’. When he is 6,000 miles away and then says I will pay you less [than agreed] …“It’s just supply and demand and it can happen overnight. If it takes five or six weeks to get to market, your product might be on the water when [your importer goes out of business]. “Exporters who have never looked at trade credit before are now,” he adds.
EXPORT CREDIT OPTION
If private insurers cannot help, exporters can talk to the government’s New Zealand Export Credit Office (NZECO).
The NZECO provides guarantees to traders and/or their banks, traditionally for exporters’ long-term contracts with clients. It also began offering the short term trade credit guarantee this year as a response to the global financial crisis.
The NZECO recently entered into a “top-up cover” arrangement with Euler Hermes Trade Credit. Under this 
arrangement administered by Eule Hermes, the NZECO may underwrite an excess layer of cover that replaces primary cover that Euler Hermes has partially withdrawn on an exporter’s buyer. The NZECO may also be able to offer a top-up layer of cover where Euler Hermes has only partially approved the buyer limit that has been requested by the exporter.
A similar reinsurance arrangement is being negotiated with Atradius Credit Insurance.
A range of companies is using the short-term guarantee, such as those in the pip fruit industry, manufacturing, wine, timber and primary commodities, including those new to exporting.
NZECO manager Carmen Moana says product applications close in June 2011 – though the guarantee stands for shipments for a year after that. To apply, go to www.nzeco.govt.nz Moana suggests exporters phone the office and discuss their needs first.