How Hermes cover works

Hermes cover is a German Federal Government guarantee protecting exporters and financing banks against political and commercial risks in cross-border sales. The scheme covers insolvency, protracted default, government action, currency transfer failure, and contract performance blocked by political circumstance. Operating since 1949, it functions as either supplier credit protection for sellers or buyer credit protection for lenders, with uninsured portions of five percent for political risks and typically fifteen percent for commercial risks under supplier credit cover.

What Hermes cover protects

Hermes cover addresses two categories of payment risk that private insurers cannot reliably underwrite: political risks and commercial risks. Political coverage includes losses from government action, legislative or administrative measures, war, civil commotion, and inability to transfer currency due to restrictions in the international payment system. The scheme also covers complete contract performance failure where political circumstances prevent fulfilment or destroy exported goods prior to ownership transfer.

Commercial risk protection includes buyer or borrower insolvency and protracted default. Protracted default is non-payment persisting beyond a defined waiting period: six months for supplier credit cover, one month after the due date for buyer credit cover. The waiting period matters because a buyer may simply lack liquidity or face temporary constraints without legal insolvency, yet the seller or lender bears growing exposure with each month of unpaid receivables.

Credit cover takes effect on shipment of the goods or commencement of services and runs until the covered amount is paid in full. For large industrial or infrastructure exports where production timelines span months, separate manufacturing risk cover protects the period before shipment and can be combined with credit cover.

Supplier credit versus buyer credit cover

Hermes cover operates through two structural variants serving different parties in the credit chain.

Supplier credit cover protects the exporter directly. The exporter extends payment terms to a foreign buyer, deferring cash collection to make the sale competitive. Supplier credit cover insures that receivable, compensating the exporter if the buyer becomes insolvent or fails to pay within the six-month waiting period. The exporter pays a one-time premium calculated as a percentage of the order value, based on country risk, tenor, and whether additional risk reduction is purchased.

Buyer credit cover protects the financing bank instead. A bank lends to the foreign buyer to pay the exporter upfront. Buyer credit cover insures the lender's receivable, protecting against the same political and commercial risks. When buyer credit and supplier credit are combined, the exporter receives full coverage: the bank's advance eliminates immediate credit exposure, while insurance on both sides ensures the export transaction proceeds.

The two instruments often operate in combination. "Combined" buyer credit cover pairs with supplier credit cover. "Isolated" buyer credit cover stands alone when an exporter declines supplier-side protection. In either case, the uninsured portion is five percent for all insurable risks.

Coverage limits and uninsured portions

Under supplier credit cover, commercial risks carry an uninsured portion of fifteen percent, meaning the exporter retains fifteen percent of any loss. This retention aligns incentives: the protected party retains material exposure and monitors the buyer's credit standing actively. For an additional premium, this retention can be reduced to five percent, aligning commercial risk handling with political risk retention.

Political risk retention is five percent. This reflects a structural distinction: political events lie beyond the buyer's control and largely beyond credit analysis. Commercial defaults, by contrast, reflect information asymmetry that proper monitoring can address.

For each transaction, a covered amount is established as a percentage of the export contract value. The percentage depends on the exporter's credit history, the buyer's country rating, and transaction tenor. Banks must confirm that Hermes coverage will be in place before advancing working capital for manufacturing, since the guarantee cannot be obtained retroactively.

Tenor and the OECD Arrangement

Hermes cover is available for transactions with repayment terms up to two years (short-term) and beyond two years (medium and long-term). The choice of tenor determines whether OECD Arrangement disciplines apply.

The OECD Arrangement on Officially Supported Export Credits establishes minimum premium rates and other financing disciplines for all member states' official export credit schemes. The Arrangement applies to officially supported export credits with repayment terms of two years or longer. Hermes cover comfortably exceeds these thresholds for medium and long-term transactions. Short-term cover (under two years) falls outside the Arrangement framework, allowing more flexible pricing and terms.

Coverage is not available across all countries. Cover facilities typically extend to all countries except exports on credit terms of up to two years to European Union member states and core OECD member states. Exports to non-OECD countries and emerging markets typically qualify for coverage regardless of tenor. This geographical limitation reflects the Federal Government's policy purpose: to support German exporters in markets where private insurers cannot offer adequate protection. EU and OECD member states are assumed to have developed financial markets and credit infrastructure; exporters to those countries can obtain private insurance at reasonable cost.

Practical application and premium structure

Federal cover is subsidiary to the private insurance market: the guarantee supports transactions where private coverage is unavailable or inadequate, keeping public resources focused on genuine market gaps rather than competing with commercial insurers.

Once approved, the scheme operates through a single premium payment. The premium is calculated as a percentage of the export contract value (excluding interest) plus processing fees. No renewal or ongoing margin applies; the exporter pays once and holds coverage for the contract's entire tenor. This contrasts with ongoing insurance, which adjusts premiums annually and reserves the right to decline renewal.

Banks and exporters typically work through brokers to confirm that all transaction elements (goods, buyer location, financing tenor, contract terms) meet scheme requirements. The guarantee can be combined with securitisation or covered bond structures to facilitate capital markets refinancing, allowing banks to hedge political and commercial risk whilst transforming the loan into a marketable security.

Hermes cover in cross-border export transactions

Hermes cover has supported German cross-border transactions since 1949. The scheme addresses a fundamental constraint on international credit: exporters to unfamiliar foreign markets cannot easily assess sovereign risk or currency stability, and private insurers require premiums so high that exports cannot compete on price. The Federal Government guarantee lowers the cost of credit insurance, making German exports competitive whilst maintaining strict underwriting and requiring the exporter to retain material exposure.

For origination and credit professionals evaluating cross-border deals involving German suppliers or German-owned export finance, understanding how Hermes cover operates is material. The guarantee may be embedded in the financing package either visibly (when discussed explicitly) or invisibly (when the exporter obtains it directly and does not disclose details to the buyer or buyer's lender). The presence of Hermes backing confirms that the exporter has undergone rigorous political and credit assessment and that the German Federal Government stands behind the credit promise.