Chennai: The entry of private general insurers has opened up a niche market segment, hitherto a monopoly of Export Credit Guarantee Corporation of India (ECGC).

ECGC, the 46-year-old company, till a year ago the sole provider of what is called credit guarantee insurance for trade receivables and trade credit insurance to India's exporters, now finds two more players fighting for a share in this Rs 400-crore market.

In 2002, India's leading non-life insurer New India and private company Tata AIG General Insurance Company entered the trade receivables insurance business. The former has tied up with Gerling NCM Credit Insurance, Germany, for this product while the latter uses inputs from American International Group (AIG), one of its joint venture partners.

But what is export credit guarantee insurance? World over, export credit guarantee is employed as a tool to protect exporters from default or delayed payment by their buyers or loss due to political risks. Today, credit insurers also offer protection for domestic trade receivables and financial investments made abroad against risks like expropriation, war and restriction on remittances.

Having its roots in Europe, the business has spread to other parts of the world in the last two decades. With the emergence of the European Union (EU) it is domestic credit guarantee in Europe whereas in other countries a distinction is made between domestic and export credit guarantee.

Why is it important? A trade credit policy enables an exporter to expand business by selling more on credit, thereby reducing the overall risk of default. Bankers are also comfortable in lending to companies having such policies.

Says Geetha Muralidhar, general manager (marketing), ECGC: "Today, in countries like the US, there is no shame attached in being declared as insolvent. So one finds bumper crop of insolvencies there and laws too favour importers. But such actions have adverse effect on their suppliers' or exporters' business." Such risks are common in the domestic trade.

It is the potential that has brought New India and Tata AIG to this segment. What the Rs 375-crore premium income ECGC covers is just 14-15 per cent of the country's total exports. In addition, guaranteeing domestic credit is also emerging as a big business with New India concluding deals in Mumbai, India's commercial capital.

Moreover, for general insurers, credit insurance is just an add-on product that helps in cementing relationships with their existing clients. For instance, in the case of New India, several exporters take out the marine transit insurance policy to cover their cargo against transit risks. And credit guarantee is a related product that could be sold with relative ease. The company can also tap clients of rival companies with this policy.

The advantage that New India has over ECGC and Tata AIG is its wide network and the bancassurance deals it has signed with nationalised banks. In export trade bankers occupy a pivotal place. Furthermore, with the risk cover and premium rate being similar, banks will favour an insurer with which it has a bancassurance deal to increase its fee income.

Says Radha Vijayaraghavan, deputy manager, New India: "Our premium rates and policy covers are flexible as they are based on the merits of each proposal."

One of the complaints against ECGC is its rigidity. "Whenever we wanted to increase a buyer's credit limit (a limit up to which credit sales to a buyer is allowed) we were not able to get it and such a rigid stance impinges upon our exports increase," says S Sripathy, deputy manager, Orchid Chemicals & Pharmaceuticals, a major bulk drug exporter.

Though New India and Gerling officials made a pitch to gain entry into Orchid as its annual premium on this business is around Rs 4 crore, the latter has got an exemption order from its bankers from taking out export guarantee insurance.

Says S Prabhakaran, executive director, ECGC: "We are taking necessary steps to meet competition." The steps he refers to are devising new products, rationalisation of premium rates, pruning the list of restricted countries and expanding the distribution network by opening 20 new offices.

In a short span of time, ECGC has introduced new products like specific buyer-wise policies and turnover policies (both short term) and Non-Recourse Maturity Export Factoring. The last mentioned product has fetched the company around Rs 50-crore premium. The company has also simplified procedures with respect to resale and reshipment of goods.

While the company has rationalised the premium rates based on its loss experience, it is also expanding the distribution network by opening offices in cities where there are exporter concentration. "Wherever a full-fledged branch is not economically feasible, a small satellite branch will be opened or we will appoint agents," says Prabhakaran. ECGC has appointed an agent in Tuticorin.

On the claims settlement front ECGC, heeding to the complaints from banks, has simplified the formalities in case of loss up to Rs 25 lakh. It also introduced on account payment of 50 per cent of the amount for claims above Rs. 25 lakh and doubled the powers of CMD to Rs 3 crore for claims sanction.

But what stands in favour of ECGC - in the short term before other players catch on - is its experience in this niche field. In addition, unlike others, ECGC also offers guarantee to banks. And the entry of new players will actually enhance the market rather than eating into ECGC's share. But the business is not easy to transact.

Says Arun Agarwal, chief executive, Cholamandalam MS General Insurance: "What is being covered is the default risk of a foreign importer/buyer. The default could be a financial default or due to political action." Heightening the risk are the local laws that are in favour of importers.

According to Agarwal, Cholamandalam MS has no plans of getting into this business in the near future.

Success secret
Success in this business depends on prudent underwriting - carefully assessing the risks like financial and political/country risks. "The biggest problem in this kind of business is everything is hazy-buyer," says Muralidhar. This is so even as the export business is well organised with checks and balances.

Tie-ups with other agencies and the insurer's own market intelligence set-up help a bit in clearing the haziness. "Before accepting an exporter's proposal we will study the importer country's economic condition by looking at its loans from the International Monetary Fund (IMF), the World Bank and its GDP [gross domestic product] growth. Weightage is also given to the kind of friendly relationship that India has with that of the buyer country and finally the underwriting experience of ECGC and other credit insurers," she adds.

ECGC has rated 210 countries and classified them into seven categories. "The higher the country rating, the lower will be the premium." ECGC has a tie-up with Dun & Bradstreet to gain knowledge about an importer while New India and Tata AIG get the inputs from Gerling and AIG, respectively. Further, ECGC is a member of Berne Union, a union of all credit insurers in the world, and the loss experiences are shared among members.

While the export trade receivables insurance scene is termed as hazy its domestic counterpart is nothing but murky. "The domestic business is plagued by a lack of proper database. There are cash-less sales and various other kinds of sales. It is trickier than the export business, which is documented fully," says New India's Vijayaraghavan.

Nevertheless, New India seems to be doing quite well in this business, bagging clients in Mumbai. "Initially the manufacturing companies bought this policy and now services sector players have also joined." According to her New India has not experienced any claims.

On the other hand ECGC, like other general insurers, suffers from underwriting loss. Last year the company earned a premium of Rs 375 crore and paid claims to the tune of Rs 450 crore. Thanks to the investment income the company was able to post a pre-tax profit of Rs 75 crore last fiscal. "Maximum defaults in the international business took place in 2002 and the situation is expected to improve this year," says ECGC's Muralidhar.

Cushioning the loss are the recoveries effected from defaulting importers after settling the policyholder's claim. Success in this aspect also determines the reinsurance terms concluded by credit insurer with overseas reinsurers. Here again, tie-ups are helpful. ECGC has a tie-up with French agency Coface for the purpose.

According to Muralidhar, recoveries have increased with banks also pursuing the same actively. "India's record in recoveries is quite good."