[ad_1]
Many limits and sums of insurance are settled in a currency other than the Australian Dollar (A$) for large volume international trade and marine insurance contracts.
Fluctuating rates of exchange between currencies are common with most entities exposed to this sector implementing forms of hedging or risk management to reduce the potential impact on their business.
Where rapid and significant divergences occur simultaneously, the best-laid hedging and risk management plans may not be sufficient to completely eliminate the impact on a business.
This bulletin highlights some of the exchange rate issues that may affect marine insurance cover.
currency and trade
The currency of the United States of America (US$) is recognized as the international currency of trade, shipping and to some extent aviation. Some other currencies, most notably the euro, are represented in trade contracts, however, the US dollar is the dominant one.
Sales and purchase agreements will often impose the trade currency of choice as the US$ which ultimately leaves most non-USA domiciled merchants, sellers or buyers exposed to foreign currency transactions and exchange rate fluctuations.
Business plans, projects and actual transactions that establish a profit or transaction margin at an expected exchange rate level, where there are sharp exchange rate fluctuations, may be erased or terminated.
potential marine impact
(where exposed to foreign exchange or foreign supplies)
Hulls – Revaluation may be desirable as machinery/parts increase in cost.
Cargo – Limits of liability may need to be reviewed and turnover and remittances are monitored to ensure that there are no surprises for the insured when adjustments are made.
Liability Limitations – May require review.
claim effect
Claims requiring payment in foreign currency will require conversion from A$ with consequent monetary impact on the insured’s claims record. Substitution of components and spares sourced from abroad may attract inflationary effects due to exchange rate fluctuations.
insurer capacity
The risk capacity per insurer will often be established on an annual basis following renewal of treaty reinsurance. Rapid and significant changes in exchange rates may lead to large limits in foreign currency or short term capacity constraints at risk of the sum insured.
Where rapid and significant exchange rate variations occur, care must be taken to accurately assess and respond to any adverse impact on insurance coverage.
Disclaimer: This bulletin is for information purposes only and does not constitute legal advice.
[ad_2]