Letter of Credit Insurance
While more export sales than ever are being made on open-account credit terms, uncertainties about foreign payment risks continue to engender widespread use of export letters of credit.
In order to keep pace with market demand, control issuing bank exposures, and use L/C services to develop new business, a growing number of US banks are obtaining letter of credit insurance.
Coverage is also available for exporters who manage their own letter of credit risks (see below).
Export L/C insurance protects confirming/discounting banks against nonpayment of documentary letters of credit issued by banks in other countries. Most policies are used to cover confirmation of sight L/Cs and/or discounting of drafts drawn on usance L/Cs. Letter of credit refinancing can also be insured.
As long as the issuing banks and country risks can be underwritten, policies may be structured for one or multiple letters of credit, single or repetitive transactions, some or all L/Cs issued by an individual foreign bank, some or all issuing banks in an individual country, or all of a financial institution’s export L/C business.
While coverage can be written on issuing banks or countries where an insured financial institution has never had L/C exposures before, most banks use letter of credit insurance to cover markets in which they’re already doing business but where growing exposures would otherwise exceed their internal capacity limitations.
Letter of credit insurance enables banks to leverage their capacity for foreign L/C exposures so they don’t have to refer business to other financial institutions, risk losing customers, or miss opportunities to provide their own L/C confirmation and discounting services.
Premium rates for letter of credit insurance are based on issuing bank and country risks, the tenor(s) of the covered letter(s) of credit, and the insured bank’s prior experience—if any—with the issuing bank and country.
Letter of credit insurance premiums are very competitive, often significantly less than the cost of international credit insurance for open-account foreign receivables.
Some underwriters set their premium rates based on issuing bank and country risks, while others assess premiums as a percentage of the insured bank’s confirmation fees or discounting/financing spreads.
In all cases the cost of L/C insurance can be passed to exporters or their foreign customers.
Meridian Finance Group has specialized in brokering letter of credit insurance for over 20 years.
All policies brokered by Meridian are backed by top-rated insurance companies or by agencies of the federal government (Ex-Im Bank, OPIC, et al). We offer coverage from every underwriter of international credit insurance, enabling us to quote the most competitive terms and premium rates in the market.
More significant than Meridian’s ability to place coverage is the comprehensive technical support we provide to our customers. Credit insurance policies work differently from other kinds of insurance, so Meridian assists with policy compliance at the same time as we help banks get the most out of their coverage as a risk management tool.
We understand your business. Our staff is multicultural and multilingual, with experience not only in letters of credit and L/C insurance but also exporting, importing, banking, trade finance, and international distribution.
Exporters who manage their own letter of credit risks, without confirmation or discounting by a commercial bank, often purchase L/C insurance for their own protection. Some exporters insure all their letters of credit. Others use L/C insurance only in cases where their banks are unable to offer confirmation or discounting services.
L/C insurance for exporters is underwritten by most of the same insurers that offer international credit insurance on unsecured foreign receivables. Letters of credit can be insured separately or alongside open-account receivables in a master policy covering an exporter’s various terms of sale.
Working capital financing can be difficult to obtain in developing countries, so foreign suppliers sometimes arrange cash deposits from their US customers or a trade finance loan from a US bank. Delivery of the goods and repayment of the loan are typically secured with a standby L/C issued by the supplier’s local bank.
International credit insurance is available to protect against non-honoring of standby letters of credit, as long as the L/Cs are clearly linked to cross-border trade transactions.
Underwriting standby letters of credit involves not only analysis of issuing bank and country risks but also review of purchase contracts and other documents evidencing the underlying export-import trade.
Policy terms generally range from 180 days to one year, but can go out as far as five years for long-term contracts.