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Businesses which trade across international boundaries expose them to particular sorts of risk, which must be mitigated through the right kinds of insurance (provided by Gallagher).
Goods might arrive damaged; shipments might be delayed or cancelled thanks to unforeseen events. A deadly pandemic might spread rapidly across the globe; a storm might render shipping lanes temporarily impassable.
In the UK, three commodities stand out as particularly important.
Gold is the biggest commodity import in the country, at $25.4 billion annually. But it’s also among the UK’s biggest exports, at around $25.8 billion, which accounts for an 8.46% share of the global market.
You’ll find a similar story for other precious metals, like platinum – of which the UK is the 2nd biggest exporter after South Africa.
Gold is valued across the world and used in everything from computers to jewellery to aeronautical engineering. Its value tends to be tied to the economy’s prospects, as investors will tend to resort to gold whenever they feel as though the future is uncertain.
Crude and refined petroleum are also critical to the UK economy.
This may change significantly in the next few years, thanks to the UK government’s ambition to ban the sale of petrol and diesel vehicles by 2030.
Other external factors might interrupt the supply of these kinds of commodities: in 2019, a fire at two major Saudi oil facilities had a marked impact on the global supply and caused the price of oil to rocket.
What is Trade Credit and Political Risk Insurance?
Political risk insurance is a product designed to guard against these threats. It’s there to protect the exporter from the potential risk of the buyer not paying for it.
So, if you’re selling goods to a part of the world whose ability to pay for them might be compromised, then you needn’t worry about being left without a buyer, or having to let those goods go at a loss: the insurance will cover you.
You’ll find a range of covered risks listed by the policy. Commercial risks might include things like buyer insolvency and bankruptcy. Political risks might include things like war, terrorism, civil unrest or sudden changes in monetary policy.
According to the Association of British Insurers, small-to-medium-sized businesses account for sixty percent of trade credit insurance policies sold in the UK.
They accounted for some forty percent of claims filed, which adds up to around £36 million. However, just one percent of exporting SMEs in the UK had applied for trade credit insurance in this period. This points to a significant missed opportunity and an enormous amount of risk which might otherwise have been protected against.
Trade credit insurance helps to encourage international trade. According to the IMF, most of the world’s economic growth is found in emerging markets.
Through insurance, a business can manage the front-end risks required to accept while trading with these markets. More than that, it expands the potential market for international business.
