The Foreign Credit Insurance Association (FCIA) is an independent association of insurance companies that issues export insurance to exporters of American goods. The FCIA was established in 1961 and its policies insure receivable accounts of American exporters in the event their foreign customers default on their payments. The policies insure against nonpayment for both commercial or political reasons. FCIA policies are administered by the FCIA Management Co. and most policies are underwritten by the Great American Insurance Company of Cincinnati, Ohio. FCIA was originally a part of the Export-Import Bank but was spun off as a public company in 1990. The Export-Import Bank still handles sovereign risks for the FCIA while Great American and other insurance companies are responsible for bankruptcy risks.
When goods are sold to a foreign company it is advantageous, for obvious reasons, for the exporter to receive payment in advance. Although this is a risk-free method of financing exports, foreign buyers seldom agree to it. Between the time that goods are shipped by the seller and the final payment is made by the buyer, the exporter is at risk of not being paid in full. If the buyer defaults on these payments it is usually for commercial or political reasons. Political reasons can include wars, revolutions, civil upheavals, nationalization policies, or currency inconvertibility. Commercial defaults are associated with insolvency, cash flow difficulties, economic downturns, or unstable market demands. Because the exported goods and purchaser are in a foreign country, recovery through litigation can be complicated, time consuming, expensive, and uncertain.
Through its export insurance the FCIA absorbs much of the risk inherent in foreign trade. Depending upon the circumstances of the contract, the FCIA may choose to issue multibuyer, new to export, single buyer, or an umbrella policy. Multibuyer policies are written for experienced exporters with multiple buyers in one or more foreign countries. These policies can be written for both short- and medium-term contracts. The new to export policies are for new or inexperienced exporters and cover short term transactions. Single buyer policies cover short- and medium-term contracts for exporters with a single foreign customer. Umbrella policies are written for short-term contracts when a third-party administrator is involved. Short-term exports are usually financed for a period of 90 to 180 days. Medium-term exports may be financed for up to five years. Often an inexperienced exporter will seek outside administrative assistance to prepare and process the necessary paperwork. In these situations, the FCIA policy is written to the administrator, not the exporter.
The popularity of export credit insurance is increasing but in the United States approximately 70 percent of exported goods are financed through letters of credit. Letters of credit are arranged between the importer and a bank, and can be quite expensive. In the United Kingdom for instance, banks charge up to 2 percent per month of the face value of the letter. Also, letters of credit are quite specific about product delivery dates, often requiring renegotiations and added fees should the specified delivery date be missed. In contrast to letters of credit, export credit insurance takes the onus off the importer while adding costs to the exporter. Nevertheless, this added cost is usually offset through increased sales.
The exporter pay premiums to the FCIA and must abide by the policy stipulations. The premiums are based on the experience and creditworthiness of the exporter and the circumstances of the trade contract. The exporter must also follow such stipulations as ceasing shipment if the importer should default on payments beyond a specified number of days. The exporter must also be able to cover any risk not covered by the FCIA, make attempts at recovery, and provide assistance to any subsequent FCIA recovery actions.
[ Michael Knes ]
Banham, Russ. "Credit Clout." International Business 10 (March 1997): 8-10.
International Trade Desk Manual. "FCIA Management Co., Inc." Plainview, NY: International Trade Desk Manual, 1996. Available from www.island-metro.com/trade/ .
Roth, Louis A. "Export and Domestic Trade Insurance." Business Credit 97 (March 1995): 4-5.