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Political risk and trade credit

Published on 17 January 2018

In this chapter of our Annual Insurance Review 2018, we look at the main developments in 2017 and expected issues in 2018 with regards to political risk and trade credit.

Key developments in 2017

With a strengthening in the commodities markets, 2017 has been a relatively more benign year than 2016 from the perspective of trade credit insurers – and this seems to have been a trend reflected on the claims side. 2017 has also seen a rise in demand for political risk and trade credit (PR/TC) insurance in developed markets, as opposed to emerging markets, in light of the growth of populism and economic protectionism exhibited, most notably, this year by the United States, Russia and India.

A particular driver is the uncertainty for businesses based in UK that trade with the EU, concerned about the potential terms of any interim trade deal and supply chain disruption. Many are looking at setting up subsidiaries and branches in the EU as a solution. Many are also asking whether the UK’s departure from the trading bloc will lead to an increase in protectionism from the EU or its member states.

Aside from Brexit’s impact as a driver for the purchase of PR/TC insurance, it is important to consider whether Brexit will have any impact on policy terms. In particular, many policies and the underlying agreements that they insure feature London arbitration as the appropriate dispute resolution forum. It will be of interest to insurers to remember that the enforceability of awards will remain unaffected as the UK is signatory to the New York Convention.

Elsewhere, international creditors are increasingly availing themselves of India’s new National Company Law Tribunal (NCLT) process under the Insolvency and Bankruptcy Code 2016, in attempts to recover outstanding receivables from Indian companies carrying huge domestic debt and that have consequently been classified as non-performing assets in the Indian banking system. The process has brought mixed results throughout 2017, and interested parties will await the year-end deadline given by the Reserve Bank of India for those companies to seek a debt resolution or be referred to the NCLT.

What to look out for in 2018

Almost all parties involved in cross-border trade are examining possible areas where blockchain technology can facilitate the sale of goods from seller to buyer and reduce the associated costs and risks. These range from banks to insurers to shipping companies such as Maersk who, in collaboration with IBM, has been piloting the use of blockchain technology to provide a digitised supply chain.

The provision of an incorruptible ledger providing true records that cannot be falsified or manipulated will be key to reducing fraud in international trade. Once this technology can be harnessed and implemented by parties in the supply chain, it should eliminate frauds based on manipulation of records, such as: the generation of duplicated warehouse receipts; the use of forged bills of lading; and fresh air exports. As the veracity of underlying transaction documentation has often presented challenges for the trade credit sector, these advancements will directly benefit trade credit insurers.

Download our full Annual Insurance Review 2018 for more insights.