Fees/Premiums

The seller bears all of the expenses for export credit insurance.  Depending on the buyers and the countries, these can range from 0.2% to 2.0% or more.  There is no impact on the buyer's credit limit with their bank, making the terms of sale very competitive.

The buyer bears most of the fees under an export letter of credit, with the exception of the confirmation fee and a document examination fee.  Depending on the country, the confirmation fee can range from 0.1% to 2.0% or more and the document examination fee is usually around 0.1%.  Meanwhile, the buyer's credit line is also blocked for the amount of the letter of credit.  For these reasons, buyers do not like to use letters of credit.

Internal Costs

Under an insured transaction, no invoices or shipping documents need be presented to the insurer unless and until the buyer defaults and a claim needs to be made. There are no strict standards of compliance for documents presented to file a claim, just evidence of the amount of the receivable(s).  Shipments, as made, must be reported, and, if the buyer goes more than 60 days past due, the situation must be reported, but reports are not subject to rejection due to errors or inconsistencies.

Each shipment made under a letter of credit involves preparation and presentation of invoices, shipping documents, etc. as required in the letter of credit.  Each shipment requires interaction with the bank.  This can be tedious and time-consuming as the documents must be perfect.

Risk Coverage

Payment under a credit insurance policy is based on compliance with the contract of sale.  The risk is that the buyer will claim that the contract was not complied with, in which case extra steps, like litigation or arbitration, may be required before an insurance claim will be paid.

Payment under a letter of credit is based on documents being presented that comply with the letter of credit.  Since the letter of credit is a separate undertaking from the contract of sale, it is possible that payment will be denied by the issuing bank and any confirming bank due to discrepancies in the documents even if the seller has complied with the contract of sale.  As long as the situation in buyer's country is stable, it is likely that the banks will allow the buyer to waive discrepancies, but, if the situation deteriorates, the confirming bank is likely to withdraw their confirmation even if discrepancies are waived, and discrepancies can be hard to avoid.

Credit insurance is based on risk sharing and covers up to 90% of the invoice value.  (It is common for “European-style” insurers to issue policies with no deductible.)

A letter of credit covers 100% of the invoice value.

Under a cancelable-limits insurance policy, the insurer reserves the right to decrease the amount of coverage at any time.  Coverage cannot be reduced for existing shipments, however.  (This resembles the situation with letters of credit.) Under a non-cancelable insurance policy, the insurer commits the limit for a full year and the price is locked in for the life of the policy.

Letters of credit are normally issued at the time orders are received; the confirming bank makes up its mind whether or not to add confirmation to each letter of credit when it is issued.  If the situation in the buyer's country deteriorates, costs may increase or banks may become completely unwilling to confirm more letters of credit or even to allow amendments to existing ones.

Financing

Post-shipment, receivables covered by credit insurance (cancelable or non-cancelable) can all be readily discounted with limited recourse, sometimes allowing them to be removed from receivables outstanding on the seller's books.

Post-shipment, receivables covered by letters of credit can be readily discounted with no recourse, allowing them to be removed from receivables outstanding on the seller's books.