COVERED ON ALL COUNTS
Ensuring your export goods get to buyers in good condition, and payment happens smoothly, requires a thorough risk management strategy.
A RISK MANAGEMENT GUIDE FOR EXPORTERS
The worldwide trend in shipping to use larger vessels, and the associated ‘hubbing’ of New Zealand exports to large ports such as Singapore, is creating new risks for exporters.
The effect is ships colliding in busy waterways and additional handling of containers at hub ports, increasing the risk of damage, says New Zealand marine manager at Vero Insurance New Zealand, Burke Butler.
Another risky freighting trend is the lack of new shipping containers and the supply ageing, especially reefers, leading to more breakdowns and claims on cargo.
Says Butler, “We encourage exporters to put pressure on container suppliers to provide newer containers. If you don’t ask you won’t get, and if you claim, in the longer term your costs will go up.
“Sometimes owners hold you liable for damage to the container, even if
it’s not your fault.”
Butler also warns that slow steaming – instigated to reduce fuel costs – will continue as a shipping practice, despite lowered oil prices, providing an ongoing risk factor for perishables especially, through increased transit times.
A positive freighting trend, however, is the increase in competition in the New Zealand insurance market, says national manager at NM Insurance, Graeme Orchard.
Lloyd’s has returned to the direct New Zealand market for cargo, hull and marine liability insurance after years of absence, as security for the new marine agency of NM Insurance.
“Any broker should try the new boy on the market; find out your [exporter’s] needs and price point, not just find the cheapest option that ends up being incorrect insurance,” Orchard says.
“We provide access to all the new toys London has; the New Zealand market has been a bit insular.”
New cargo policies commonly extend beyond the transit to cover storage that can be for months in an overseas warehouse managed by transport logistics operators.
“Try transferring your exposure onto your logistics provider for the value of your stock in storage at foreign destinations awaiting distribution. This might make the exporter’s insurance cheaper because the local insurer does not have to be concerned with the foreign static risk, particularly in locations he knows little about,” recommends Orchard.
Internationally marine liability insurance for logistics providers is different from what’s commonly available in New Zealand to, he says, recognising the trend to pick and pack as third party distributors, and even handling customer returns, inventory management and invoicing.
Atradius Credit Insurance’s New Zealand country manager Martin Jones says the risk of non-payment is foremost in an exporter’s mind. Credit insurance is often a bank requirement before export finance is granted.
“While cash in advance is ideal, there are not many buyers willing to oblige since there are other suppliers in the market who will offer them generous open account terms of payment (30, 60 or 90 days) at no extra cost.
“Letters of Credit are generally time consuming and costly to set up. They are also not a guarantee of payment since they depend on the buyer having sufficient funds to meet the Letter of Credit obligation, and the issuing bank being in a position to honour it. In certain developing countries that is not always a given.
“Credit insurance then becomes a preferred solution since it provides security for credit sales, it comes with credit management support, it provides insight into current and prospective customers’ ability to pay and it gives the seller the freedom to make his other business decisions without the worry of bad debt.”
Most cover is short term (up to one year) but can be medium and longer-term, says Jones.
The New Zealand Export Credit Office (NZECO) covers both political and commercial risk around the buyer’s ability to pay – but not performance risk. For example, if something goes wrong with the shipment or the goods are rejected on quality.
Head of business origination at NZECO, Peter Rowe, recommends exporters first do their due diligence. “Know your buyer: are they established? Do they actually exist? Who else sells to them? Be comfortable about the buyer. Then everything else is a secondary mitigant: ask for a cash deposit or Bill of Lading or Letter of Credit.
“If none of these are available and it has to be an open account sale because the buyer won’t pay up front, then you may want to consider trade credit insurance.”
Country risks vary
Beware that cover is not available when goods are in some locations, often in third world countries such as Afghanistan where trucks are targeted and whole cargoes go missing, says Butler.
Russia has been a problem too while trade sanctions are in place.
Another market peculiarity could be rejection of goods as a means of trade protection. For example, in the US under the Bush Administration, if cartons of beef were found to have damage, although the meat was fine a whole shipment had to be dumped.
Certain European government authorities have rejected fish at ports to protect the local fishing industry.
While free trade agreements and better relationships help, business is still business, warns Butler. “Look at the milk powder [rejection] in China – due to a lack of communication about a change of documents.
“Rejection cover can be insured as an extension to a marine cargo programme but is expensive and only available to companies we have a longstanding relationship with.”
Payment terms can also vary, Jones says. For example, in China, buyers usually pay a 30 percent deposit on placement of order, 40 percent on delivery and the balance at the end of an agreed credit period.
In the Pacific Islands, it is not uncommon to sell by “TT Fax prior” where the exporter ships the goods, then faxes the invoice to the buyer for payment before the ship arrives at destination.
Jones says risk also varies across industries in each country. A good (low risk) industry in New Zealand might not be considered so in another country. The levels of competition within an industry in other countries may affect pricing and terms.
NZECO’s Rowe says it’s important to understand normal terms of trade in the country and speak to other exporters operating in the same country. “Find out if there’s a culture of disruption, or late or non-payment.
“For example, we’ve received enquiries from exporters experiencing difficulty getting US dollars out of Egypt and we were able to advise that’s not right; that people/buyers have been using the uprising as an excuse not to pay.”
Orchard says brokers and insurers need to know their economic geography: to understand ports and how goods are moved through them, and domestic risk factors within emerging markets.
Setting up insurance for smooth claiming
Burke Butler at Vero Insurance says in setting up insurance cargo policies the exporter needs to advise the insurer or broker the following information:
• The interest insured.
• Countries exported to, and/or imported from.
• Claims history.
• Risk management procedures.
• Terms of sale – for example CIF (Cost, Insurance and Freight).
When things go wrong with cargo delivery, firstly endeavour to minimize the loss, then contact your broker or insurer, he says.
Exporters should immediately provide these documents for a quicker and smoother claims process:
1. Letter of Credit.
2. Certificate of Insurance.
4. Bills of Lading.
5. Delivery receipts.
6. Proforma Claim against the carrier.
When payment becomes overdue (i.e. the payment due date on the invoice is not met) Rowe says exporters should notify their [trade credit] insurer, and this starts the claims waiting period while the exporter pursues the buyer.
The required pursuit period varies on a case-by-case basis and could be three to six months of attempts to recover payment. The exporter must confirm their efforts and be diligent in pursuit of the claim.
The cost of trade credit insurance depends on factors including the buyer risk class, the risk level of the buyer’s country and the length of cover sought (for example, 30, 60, 90, 120 days, or up to 360 days).
Rowe advises placing a year’s worth of cover for ongoing shipments to a specific buyer. NZECO also covers one-off shipments.
NZECO might suggest exporters go to a private trade credit insurer or get a bank’s Letter of Credit or deposit or foreign exchange hedging. NZECO complements the private trade credit insurance sector.
“Our mandate is to support exporters wanting to trade overseas having a genuine opportunity, but they need to be established companies; we struggle to support start-ups,” says Rowe.
Brokers and insurers need to know their economic geography: to understand ports and how goods are moved through them, and domestic risk factors within emerging markets.”
– Graeme Orchard, NM Insurance.
However, if a business is a proven company with an established product and it’s their first time exporting, NZECO can help.
The maximum insurance cover from NZECO is decided on a case-bycase basis.
“If you as the seller want trade credit on Coles [retailer] we might have a higher appetite than with ‘ABC’ [unknown] company in Australia.”
When it comes to prompt claiming for late payment, Jones says the reason for non-payment is important because it might provide insight into the likelihood of recovery from the debtor.
“Atradius would then advise on the most appropriate action to be taken to ensure that payment is made, such as referring for collection, or legal measures.”
Jones says credit insurers use the term ‘date of ascertainment of loss’ for claim purposes. That date depends on the cause of the loss. When payment is overdue because of the buyer’s insolvency, the date of loss is on the occurrence of insolvency, such as the date of the winding up order.
For a protracted default (overdue), the date of loss is the date on which the applicable waiting period expires – based on the original due date, which in turn runs from the date of commencement of risk.
For exporters, risk begins when the goods are dispatched. For service providers, cover usually commences when they submit their invoice.
Equally important for the exporter (and its bank) is to understand why some claims can be declined. Reasons include the exporter having no insurable interest, notifying of an overdue invoice late, or exceeding the credit limit.
Advice for newcomers
The main consideration in insuring goods during their transit, says Butler, is to understand Incoterms – these are standard definitions when purchasing or selling goods internationally that define at what point the seller and buyer are responsible for the goods. The terms are included in shipping documents.
For example, on CIF the seller is responsible for arranging marine insurance; a sale on Ex Works makes the buyer responsible.
“Ensure goods are covered for the full transit, not just on the vessel/ aircraft,” says Butler. “Consider how many countries and jurisdictions the goods have to cross to get to their end point.
“Get terms to suit, and get in early before the buyer defines the terms. And don’t leave insuring to the buyer – it’s like getting blood out of a stone [if things go wrong],” he suggests.
“Use a New Zealand-based insurer, with claims handled in New Zealand. You can talk to your broker/insurer here in a way you can’t with an overseas-based claims team.”
Find a broker by word of mouth or on the IBANZ (insurance brokers association) website, he says.