The Private Export Credit Insurance Effect on Trade

• Date: 01 September 2015
• DOI: http://doi.org/10.1111/jori.12034
• Author: Koen J. M. van der Veer
• Published date: 01 September 2015

©2014 The Journal of Risk and Insurance. Vol.82, No. 3, 601–624 (2015).

DOI: 10.1111/jori.12034

The Private Export Credit Insurance Effect on Trade

Koen J. M. van der Veer

Abstract

International trade relies on trade finance (credit or insurance) by financial

institutions. Evidence on the link between trade finance and trade is scarce,

however, because trade finance data are hard to come by. This article uses a

unique bilateral data set on worldwide exports insured by a world’s leading

private trade credit insurer in the period from1992 to 2006. Applying various

trade models, I consistently find a positive and statistically significant effect

of private export credit insurance on exports. The results suggest that the

private export credit insurance effect on trade is larger than the value of

exports insured.

Introduction

Financial institutions play an important role in facilitating international trade. Accord-

ing to estimates by the International Monetary Fund, about 40–50 percent of world

trade relies on some form of bank-intermediated trade finance, public or private export

credit insurance (see Asmundson et al., 2011). The importance of banks in support-

ing international trade has been well established in recent studies. For example, in

a key contribution on bank-intermediated trade finance, Amiti and Weinstein (2011)

relate firms’ export performance to the health of the banks providing trade finance

and show that financial shocks are transmitted from banks to exporters.1Likewise,

Koen J. M. van der Veeris at the De Nederlandsche Bank. The author can be contacted via e-mail:

k.j.m.van.der.veer@dnb.nl.I am especially grateful to Andrew Rose for his guidance throughout

this project. I thank Martin Admiraal and Henk van Kerkhoff for their help with collecting the

data. For helpful suggestions on an earlier draft, I thank Peter Egger and Christoph Moser.I also

thank Paul Becue, Gabriele Galati, Marco Hoeberichts, Eelke de Jong, Pierre Lafourcade, Iman

van Lelyveld, Jeromin Zettelmeyer, and seminar participants at the World Bank DECTI Trade

Seminar, EuropeanBank for Restruction and Development, European Central Bank Workshop

on Trade and Competitiveness, the 16th International Conference on Panel Data, De Neder-

landsche Bank, and two anonymous referees for useful comments. I thank the private trade

credit insurer for kindly providing data and their staff for fruitful discussions. I bear full re-

sponsibility for any remaining errors. An earlier DNB WorkingPaper version of this article was

circulated under the title ”The Private Credit Insurance Effect on Trade.” The views expressed

in this article are those of the author and do not necessarily represent those of the Dutch central

bank.

1Relatedly,others have found that exports of firms that are more dependent on external finance

are the most affected during a financial crisis (Iacovone and Zavacka, 2009; Bricogne et al.,

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602 The Journal of Risk and Insurance

there is also growing evidence that public export credit agencies (ECAs) are effective

in stimulating exports (Egger and Url, 2006; Moser, Nestmann, and Wedow, 2008;

Felbermayr and Yalcin, 2013). However, except for a recent contribution by Auboin

and Engemann (2012), who find a positive effect of a combined measure of publicly

and privately insured trade credits on trade, little is known about the role of private

trade credit insurers in world trade.2

This article contributes to fill this gap in the literature on trade finance and examines

the trade-promoting role of private trade credit insurance, a specific form of trade

finance that covered an estimated EUR 1.84 trillion of international and domestic trade

in 2011 (ICISA, 2012). I exploit a unique bilateral data set on the worldwide activities

of a leading private trade credit insurer and find direct evidence of a positive effect

of private export credit insurance on exports. Moreover,the results suggest that there

is a trade multiplier of private export credit insurance; every euro of insured exports

seems to generate more than EUR 1 in total exports.

Private export credit insurance is a useful tool for an exporter selling goods on credit

to insure against the risk of nonpayment by an importer.3It is distinct from freight

insurance that covers the risk of loss or damage to goods in transit. A private insurance

policy generally covers commercial and political risk. “Commercial risk” refers to

nonpayment due to default or insolvency and “political risk” relates to nonpayment

as a result of action by the importer’s government (i.e., intervention to prevent the

transfer of payments, cancellation of a license, or acts of war or civil war). Jones (2010,

p. 9) explains the need for private trade credit insurance as follows:

The need for trade credit insurance arises from the common practice of

selling on credit and the demand by buyers to trade on open account,

where they only pay for the goods and services after having on-sold them

and are not willing to provide any form of security, for example, by way

of full or partial advance payment, bank guarantee or letter of credit.4

2012; Chor and Manova, 2012), and that the availability of short-term credit affect a country’s

exports (Ronci, 2004; Berman and Martin, 2012).

2In Van der Veer (2011), I discuss the possible role of private trade credit insurers during the

world trade collapse in 2008–2009, and review policy measures taken within the European

Union to support the market for short-term export credit insurance in that period. In that

article, I also extrapolate the private export credit insurance effect that I find in this article to

the period of the world trade collapse.

3The focus in this article is on private export credit insurance, but private trade credit insurance

is also used to cover domestic trade.

4One reason why an importer could refuse to approachits bank to request a payment guarantee

or letter of credit is that it is charged against the importer’s overall credit limit set by the bank

(Jones, 2010). As a result, banking products to cover nonpayment risk reduce the importer’s

borrowingcapacity. Private export creditinsurance, in turn, facilitates international trade based

on supplier credit without reducing the importer’s access to bank credit. In fact, private export

credit insurance is generally purchased by the exporter even without the importer knowing

it. Another difference is that the banking products generally cover a single transaction for a

single importer,whereas private export credit insurance policies are usually “whole turnover,”