Large amounts of international trade and many limits and sums insured for marine insurance contracts are traded in a currency other than the Australian dollar (A$).
Fluctuating exchange rates between currencies are common and most entities exposed to this area implement forms of hedging or risk management to reduce the potential impact on their business.
When rapid and significant variations occur together, the best hedging and risk management plans may not be enough to completely eliminate the impact on a business.
This newsletter highlights some of the exchange rate issues that can affect marine insurance coverage.
Currency and Trade
The currency of the United States of America (US$) is recognized as the international currency of commerce, maritime transport and, to a lesser extent, aviation. Some other currencies, notably the euro, are shown in trading contracts, however the US dollar is predominant.
Purchase and sale agreements will often dictate the trade currency of choice as US dollars, eventually leading to most non-US domiciled merchants, sellers, or buyers in a foreign currency transaction and exposure to foreign currency. exchange rate fluctuation.
Business plans, projects, and actual transactions that establish profits or transaction margins at an expected exchange rate level can be eroded or extinguished when rapid exchange rate fluctuations occur.
probable marine impact
(when exposed to foreign currency or supply abroad)
Hulls: Revaluations may be desirable as machinery/parts costs increase.
Cargo – Liability limits may need to be reviewed and turnover and shipments may need to be watched to ensure that an explosion in numbers does not surprise the insured at the time of adjustment.
Disclaimers: May need review.
Impact of claims
Claims requiring payment in foreign currency will need conversion from A$ with the resulting monitoring impact on the insured’s claims record. The replacement of components and parts coming from abroad can attract inflationary influences due to the fluctuation of the exchange rate.
insured capacity
The insurer’s risk capacities will often be established annually after reinsurance contract renewal. Rapid and significant changes in exchange rates can generate short-term capacity constraints on risks with large limits or amounts insured in foreign currency.
When rapid and significant exchange rate changes occur, care must be taken to accurately assess and react to any adverse impact on insurance coverage.
Disclaimer: This newsletter is for informational purposes only and is not legal advice.
