Phillip Krinker

Credit Insurance and political/commercial risks

5th September 2018 Phillip Krinker 0 Comments

It is becoming increasingly more common for Brazilian companies to sell on credit to other countries and, from a certain standpoint, that is an indication of success and of the conquest of new markets. However, sales to this type of client can turn into a headache in the case of insolvency or default.
To avoid this type of problem, most Brazilian companies that contract insurance for Political Risks use the cover provided under Export Credit Insurance. Through this type of Credit insurance, it is possible to cover the risk of debtor insolvency caused by Commercial Risks and/or Political Risks.

Commercial Risks Cover

“Commercial Risks” insurance covers losses caused to the Insured by the debtor through non-payment of merchandise and/or services provided due to insolvency or prolonged default of the debtor.

The debtor is not always at fault for the non-payment of invoices. The debtor may fulfil its obligations and pay its invoices timely, but remittances can be blocked by the government of the importing country, resulting in losses to the insured due to non-payment of invoices. However, if the insured includes the Political Risks cover in his Export Credit Insurance policy, this type of loss will be indemnified by the insurer.

Political Risks Cover

An insurance not much used by Brazilian companies is the Political Risks insurance, which can be used to cover foreign investments against the risks of nationalization, confiscation, and inconvertibility of currency.

This type of insurance covers investments made abroad by Brazilian investors against the major Political Risks:

- Damage caused through violence (civil war or even riots caused by protestors);
- Impossibility of transferring resources to head office;
- Expropriation of company assets without adequate compensation;
- Breach of contract between the government and a private entity;
- Non-fulfilment of sovereign guarantees, i.e., when a government fails to honor clear guarantees provided for certain projects, usually applicable to countries with a high risk level.

Brazilian companies, in addition to the possibility of insuring their physical assets, such as: industrial plants, mining equipment, constructions, infrastructure projects, etc., may also cover loss and damage caused by cancellation of contracts signed with foreign governments due to breach of such contracts.

Sometimes it is necessary to make huge pre-operational investments to build industrial plants, mining projects or infrastructure projects, and then companies run the risk of having contracts cancelled by foreign governments for political reasons, and sustaining great financial losses even before the fixed assets are built in those countries.

What is required to take out insurance for Political Risks or Commercial Risks?

To contract insurance for this type of cover, it is necessary to complete a basic questionnaire, with the details of the investment to be made abroad. The cost will depend on some variables:

- Type of investment;
- Length of policy period;
- Value of the insured property or interests;
- Country where the investments will be made;
- Relationship between Brazil and the foreign country.

Brazilian companies purchase Political Risks and Commercial Risks insurance mostly for Latin American, African and Asian countries.

If your company is expanding its sales abroad, perhaps it would now be convenient to obtain protection for these risks and take out this type of insurance. Do get a quotation.