Pre-shipment risk
The risk an exporter bears when the contract is interrupted before delivery, by a political event or the buyer's default, after it has already incurred manufacturing costs, insured separately from credit risk.
An exporter manufacturing custom equipment for a foreign customer incurs expenses long before issuing its first invoice: engineering, component purchases, labor, subcontracting. If the contract is interrupted during that phase, because the buyer defaults, an embargo hits the destination country, an export license is withdrawn or a war breaks out, there is not yet any receivable to insure as credit, and yet the loss is real. Pre-shipment cover addresses precisely this period, between contract entry into force and delivery. The indemnity covers expenses incurred and not recoverable, net of down payments received and the resale value of what has been built. For specific equipment, that resale value is often low, which makes the cover decisive. It is offered by public credit agencies and by the private contract frustration market. For the underwriter, manufacturing time and the specificity of the goods are the two key variables, because they determine both the maximum exposure and the probable loss if the contract is interrupted.
Textbook case: a manufacturer spends 12 million euros building an electrical substation for a country that falls under embargo in the eighth month of the project. It has received a 3 million down payment and can resell the equipment for only 1 million: its 8 million loss is indemnified under pre-shipment cover, within the insured percentage. Dated case: on May 8, 2018, the United States withdrew from the Iran nuclear deal and reimposed its sanctions with 90 and 180 day wind-down periods, which expired on August 6 and November 4, 2018; European makers of equipment bound for Iran had to halt orders still in production.
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