COV­ERED ON ALL COUNTS

En­sur­ing your ex­port goods get to buy­ers in good con­di­tion, and pay­ment hap­pens smoothly, re­quires a thor­ough risk man­age­ment strat­egy.

Exporter - - FRONT PAGE - By Mary MacKin­ven.

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.

Pay­ment back-up

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.

• Turnover.

• 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.

3. In­voice.

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.

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