What risks are possible with international trade?
Transactions across borders can be complex and risky. From purchaser defaults to geopolitical crises, businesses that trade face many uncertainties that can at least partly be mitigated by insurance. From the moment a transaction is initiated, there are uncertainties about the trustworthiness of the business partner, whether the specified amount and quality 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 the costs and potential benefits of purchasing some form of trade-related insurance. For more information on trade risks and insurance, see Trade Finance Global’s FAQs on risk and 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. More information is available on Trade Finance Global’s webpage dedicated to Bond Insurance Policy.
- 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, 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 mitigate 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 also 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.
- 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.
- 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.
Where can I learn more?
For an overview of the various types of trade insurance available and guides on how they work, see Trade Finance Global’s FAQs on risk and insurance.