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About Trade Insurance

Trade Insurance

Marine Insurance is what must come to people’s mind when they think of insurance related to trade. It is an insurance that indemnifies losses incurred from destruction or damage to exported or imported cargo during voyage. For example, when cargo is destructed or damaged because the ship sank or was destroyed by fire en route, the loss will be indemnified.

In comparison Trade Insurance covers risks that arise from trade transactions and overseas investment which are not in general covered by marine insurance. This system developed at an early stage in the Western countries including United Kingdom, in countries which are highly dependent on trade. It is also called Export Credit Insurance or Export Credit Guarantee.

Investment Insurance which covers risks involved in investment is relatively new compared to insurance of trade transactions and the system spread to other countries of the world from the United States.

Type of Risks

NEXI covers losses incurred from the following risks:

Political Risks

Political risks are inevitable risks that arise from overseas transactions such as trade which the party concerned are not responsible. These are for example restriction/prohibition of exchange dealings, raise in tariffs,
restriction/prohibition of imports, acts by a third party other than the party concerned such as war or revolution, or natural disasters and extraordinary events. Inability of export due to political risks, inability to collect export proceeds or prepaid money, or when stocks acquired through overseas investment is confiscated due to political risks, the losses will be covered by Trade Insurance.

Commercial Risks

Commercial risks are risks which the counterpart of overseas transactions such as trade is responsible. For example, when it is unable to collect export proceeds or loan because the counterpart of export contracts went bankrupt or the borrower doesn’t repay the loan, or when it is unable to export or import because the counterpart went bankrupt before exporting or importing, the losses will be covered by Trade Insurance.

The difference between political risks and commercial risks is that the party concerned is not to be blamed for political risks while the counterpart of overseas transactions is responsible for commercial risks.

Role of Trade Insurance

Providing Sense of Security

By covering risks involved in overseas transactions Trade Insurance provides the companies with "sense of security". This is the essential role of Trade Insurance. When a company is covered by Trade Insurance, losses will be indemnified in case an insured risk occurs and the company will be able to continue conducting business activities without suffering great damages. In this way Trade Insurance not only protects business activities but contributes to the stable development of Japanese trade through providing "sense of security" to people who are engaged in the trade business.

Means of Granting Credit

It is possible for the people engaged in trade to conduct trade finance safely and easily when risks of collecting export proceeds or prepaid money for imports are covered by Trade Insurance. The fact that it is subject to take out Trade Insurance as a rule when getting finance from Japan Bank for International Cooperation in deferred payment exports (plants, machinery, etc.) shows a good example.

Business Operations of Trade Insurance

Japan’s Trade Insurance is operated based on the principle of financial break-even under the Trade and Investment Law and the Trade Reinsurance Special Account Law. Insurance operations including underwriting have been conducted by the government (Ministry of Economy, Trade and Industry) but since April of 2001 Nippon Export and Investment Insurance (NEXI) an independent administrative institution is conducting the operations. The government reinsures insurance accepted by NEXI in order to complement the creditworthiness. Trade Insurance is conducted by the government or by government related institutions or private non-life insurance company supported by the government in most countries of the world. For example, in the United Kingdom ECGD (Export Credits Guarantee Department of the Department of Trade and Industry), in the United States EXIM Bank (Export-Import Bank), in Germany HERMES, and in France COFACE conduct the insurance operations.

The reason the government provides reinsurance is that in many cases there is a need to simultaneously pay a great deal of insurance claims so the insurer has to possess unlimited amount of collateral to cover the losses, the need to have international negotiations between countries, and judging from the commercial point of view Trade Insurance is expected to be used as a tool in promoting trade are at the root.

Since Trade Insurance is basically a contract in the form of insurance, insurance contract is concluded when an agreement is reached between the policyholder who applies for insurance and NEXI who accepts underwriting. The Trade Insurance system was established with the aim of promoting the sound development of overseas transactions such as trade and NEXI will not refuse to accept underwriting of a particular insurance application without sufficient reason.

However there are cases where underwriting will not be accepted because Trade Insurance is operated on a self-supporting basis with the principle of financial break-even and it is possible to restrict underwriting for countries carrying substantial risks.