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Cost Effectiveness Drives Exporters From L/Cs To Credit Insurance


From the September 2001 edition of Managing Exports

Over the last few years, export professionals have been virtually bombarded with predictions of the imminent demise of the venerable Letter of Credit-and its replacement by automated, paperless substitutes (see 3 Electronic Platforms Connect Exporters, Banks and Insurers, in this issue). To paraphrase W.C. Fields, reports of the L/C's death have been greatly exaggerated. However, while the expensive and error prone L/C will likely be with us for some time yet, it's clear that frustrated export pros are increasingly turning to alternatives. Following in the footsteps of European rivals, many U.S. exporters have migrated toward competitive open account terms backed by export credit insurance.

Credit Insurance vs. L/C

PA recent study published by Lloyd's Freight Transport Buyer Asia not only details this shift, but provides evidence for the cost-effectiveness of credit insurance over L/Cs. According to the Lloyd's data, 30% to 35% of international transactions are now open account with credit insurance, while 20% to 25% are still covered by L/Cs (see accompanying chart). Furthermore, the average fees paid by buyer and seller (based on an average international trade transaction of manufactured goods of $50,000) is $1,000 to $1,500 for a Letter of Credit versus $50 to $200 plus the variable cost of the insurance premium for export credit insurance. Note that this L/C cost does not include administration, systems cost, and time value of money associated with paper-based processes. The payment guarantee for both approaches is full and the export credit route is faster and simpler.

Major U.S. credit insurers include the following:

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