What Is the Foreign Credit Insurance Association (FCIA)?
The Foreign Credit Insurance Association (FCIA) is an association of insurance companies that offers insurance to U.S. exporters against nonpayment by foreign customers due to commercial and political risks.
- The Foreign Credit Insurance Association (FCIA) provides insurance to American companies exporting abroad against certain risks.
- In particular, the FCIA insures against nonpayment due to geopolitical risks overseas.
- Unlike a letter of credit from a commercial bank, the FCIA directly underwrites insurance policies.
Understanding the Foreign Credit Insurance Association
The Foreign Credit Insurance Association offers insurance to reduce the risks export companies take when they engage in trade with foreign countries. Since exporters typically do not receive advance payment for orders they ship, they run the risk that buyers will default on payments.
Typical reasons for default include commercial issues such as issues with a buyer’s cash flow, bankruptcy, or other market-based issues. International markets also present political risks such as war, political revolutions, or difficulty in converting a foreign currency. Further complicating matters, the presence of buyers in foreign countries puts them beyond the reach of the typical laws a seller could use to recover their losses in a domestic market.
The FCIA has existed since 1961 to offer insurance for situations in which foreign buyers refuse to make timely payments. Different types of policies cover different degrees of risk, typically depending on the amount of experience exporters have with particular buyers in specific jurisdictions and the length of the term involved. Short-term contracts typically run for 12 months, for example, while medium-term contracts can cover periods of one to seven years.
For example, exporters with a long history of successful transactions can generally purchase multi-buyer policies covering short- and medium-term contracts. Single-buyer policies cover exporters with long-term experience with a single foreign buyer. Other policy types include new-to-export policies, issued for inexperienced exporters, and umbrella policies which typically cover short-term contracts and require the involvement of a third party to assist in processing paperwork.
Export Credit vs. Letters of Credit
The export credit insurance offered via the FCIA covers direct contracts between buyers and sellers. Exporters seeking to reduce the risk of a given transaction can require a letter of credit, which adds a third-party issuer to the mix. A foreign bank typically underwrites a letter of credit based upon collateral put up by the buyer. These instruments perform like a guarantee, with the issuing bank providing a backstop against default by the buyer.
Letters of credit do not eliminate risk by themselves, however. Importers engaging in transactions that use letters of credit can purchase a different type of insurance called a bank letter of credit policy. These policies provide coverage similar to that provided by the FCIA for export credit transactions.
View more information: https://www.investopedia.com/terms/f/fcia.asp