2011 508 accessible version - Export-Import Bank of the United States

Chapter 3: Core Business Policies and PracticesSection C: Risk PremiaIntroductionTo cover the risk of non-payment for a transa ction, ECAs charge risk premia, otherwiseknown as exposure fees. The 1999 Kn aepen Package implemented by the OE CDParticipants was negotiated to level th e playing fiel d among ECAs. The agreem entdefined the elements for determining sove reign buyer fees and set Minimum PremiumRates (MPRs) for transactions with sove reign buyers. The MPR sets the floor forstandard export credit pricing of sovereign buyers. Shortly after the Knaepen Packagewas implemented, the Participants embarked on negotiations to institute a buyer riskclassification and pricing system, as it wa s evident that ECA business wa s moving fromsovereign to non-sovereign buyers. The negoti ations continued for many years but withno success. After a two-year lapse, the OECD Participants reignited the negotiations inJune 2008. A new comprehensive fee structure, refer red to as t he Malzkuhn-DrysdalePackage was approved in Febru ary 2010 with an implementation date of September 1,2011.The Malzkuhn-Drysdale Pack age established a non-sovereign buyer fee system,including both guidance on risk classification as well as MPRs for non-sovereign buyers.It also updated the MPRs for sovereign bu yers and established pricing protocols fortransactions in high-income OECD and Eu ro-area countries (also known as Category 0markets).Several elements determine the MPR for both sovereign and non-sovereign buyers: ( i)the percentage of cover; (ii) the q uality of the product—that is, whether the financing isan unconditional guarantee or conditional insurance; and (iii) the claims paymentpolicy. The latter two factors determin e whether a product is considered “abovestandard”, “standard”, or “below standard.” 1 Because coverage may differ based on thesefactors, the three types of products are pric ed differently, with “above standard” bein gthe most expensive and “below standard” the least expensive. These variations allow forsurcharges or discounts based on the typ e of product to ensure a level playing fieldamong ECAs. In addition, surcharges and di scounts are applied when the cover differsfrom the typical 95% level of coverage. For example, for 100% cover, there is a surchargebetween 5.3% and 14.3% depending on the country’s risk level; and for 90% cover, thereis a discount of 5.4%.Under the Malzkuhn-Drysdale Package there are now 7 categories of buyer risk in whichobligors may be classi fied: better than so vereign, sovereign or equ al to sovereign and 5buyer risk categories riskier than the sovere ign classification. The riskier th e buyer, the1 Above Standard Product – i.e. guarantees; Standard Product – i.e. insurance with cover of interestduring the claims waiting period without an appropriate premium surcharge and direct credit/financing;and Below Standard Product – i.e. insurance without cover of interest during the claims waiting periodand insurance with cover of interest during the claims waiting period with an appropriate premiumsurcharge.33