International trade insurance indemnifies importers and exporters against various types of losses, including damage to goods in transit, products injuring consumers and importer non-payment. To indemnify means to compensate a company when it loses money due to one of these events. The insurance industry plays a role alongside banks and financial intermediaries in ensuring that parties to an international sale have the capacity to effectively transact business across international borders. Insurance agencies take on some of the risk so that exporters, particularly, are able to seize opportunities to expand their businesses into foreign markets.
The insurance industry has a vested interest in a robust economy with a healthy business environment that can reach customers globally. Along with governments, banks and financial intermediaries, insurance agencies develop products that facilitate international sales. Particularly with small and mid-size businesses, insurance agencies can use their familiarity with foreign markets to relieve some of the risk a novice exporter experiences by not having the type of institutional reach that would allow the exporter to easily check an importer's credit and business history.
Insurance agencies develop different international trade insurance products from time to time, such as foreign currency exchange insurance, but the main types of insurance used to facilitate trade include export credit, cargo and product liability insurance. Export credit insurance enables exporters to offer importers open credit terms. The insurance provides protection again nonpayment by the importer and will payout the majority of the value of a defaulted receivable. Provided the exporter has the resources and cash flow to comfortably float product to the importer with a promise of payment that might not happen for as long as 180 days, the insurance removes the risk inherent in the credit extension.
Cargo insurance is a type of international trade insurance that insures goods in transit. It can be taken out by importers or exporters and typically contains provisions that are determined by the terms of the sales contract. This type of insurance guards against complete loss, damage that occurs while shipping and any damage that happens while the goods are sitting in customs warehouses in either country. Certain eventualities that can happen when goods enter a foreign country are also covered, such as seizure and products opened during inspections and rendered unsaleable.
The other common type of international trade insurance covers product liability. If a customer suffers an injury as a result of imported products, the liability can be significant. Often, the exporter and importer have this type of coverage as part of their blanket business insurance policies. Specific coverage of goods imported or exported to foreign countries often has to be added to policies that only cover domestic sales. Alternatively, the parties must obtain a separate policy to protect their business interests.