What are the challenges and risks in international trade?
Transactions across borders can be complex and risky. From not getting paid to geopolitical crises, businesses that trade across borders face many uncertainties. These can partly be eased by insurance. From the moment a transaction is started, there can be doubts about the trustworthiness of a business partner, whether the specified amount and quality of goods will be shipped, when the goods will be received, and more. Businesses should consider which risks they are most likely to face with any given transaction and weigh up the costs and potential benefits of purchasing some form of trade-related insurance.
What types of trade-related insurance are available and what do they cover?
- Bonds are a financial product that ensures payment of a transaction. It is a type of insurance whereby an insurance company guarantees scheduled payments of interest and principal on a bond or other security in cases where the issuer of the bond or security has defaulted on payment.
- Credit insurance is a frequently used type of trade insurance. Importers guarantee to exporters that they will pay them in full when the contractual conditions are met. If the buyer does not fulfil the contract and defaults on payment, the insurance company compensates the seller.
- Foreign exchange risk insurance is a forward operation where a contract can be arranged with a financial institution to buy/sell currency on a specific date at a pre-defined exchange rate. This type of insurance is offered by financial institutions to lessen the loss from exchange rate fluctuations.
- Financial guarantees are binding, non-cancellable promises backed by banks or insurers to underwrite a contract and make payments to a recipient if terms are not met. Besides protecting the exporter against non-payment, guarantees can also protect importers against the risk that the supplier will not fulfil the contract.
- Political risk insurance covers the risk of the overseas government intervening in the investment, and if events that are considered “political” in nature interfere with a transaction. Examples of the latter situation include the expropriation of assets or the outbreak of violence. Although sometimes sold separately, it is important to note that many credit insurance contracts also cover political risk.
- Product liability insurance covers risks from litigation if the product fails to comply with national regulations.
- Surety is a guarantee issued by a third party to pay the loss suffered by one party in a contract in the event of complete failure to fulfil a contract. In this case, the third party assumes the responsibility of paying the contract.
- Transit insurance, for merchandise that is currently being transported, includes:
- Marine cargo insurance, which protects the shipment of merchandise via a cargo vessel, including from ship to terminal.
- Air cargo insurance, which provides protection against loss, damage, and sometimes the delay of shipments via aircraft.
- Ground transportation insurance, which is available for additional coverage for goods shipped by road and rail. This type of shipper is usually already liable for delivering the merchandise as received, with certain exceptions.
Links to Supporting Information
Trade Finance Global Risk and Insurance – Trade Finance Global An overview of the various types of trade insurance available and guides on how they work.
Trade Finance Global Bond Insurance Policy Information on Bond Insurance