Large amounts of international trade and many limits and sums insured for Marine insurance contracts are negotiated in a money other than Australian Dollars (A$).
Fluctuating rates of exchange between currencies are shared with most entities exposed to this area implementing forms of hedging or risk management to reduce the likely impact on their business.
Where rapid and meaningful variances occur together, the best laid hedging and risk management plans may not be sufficient to completely eliminate impact on a business.
This bulletin highlights some of the exchange rate issues which may impact Marine insurance covers.
money and Trade
The money of the United States of America (US$) is recognised as the international money of trade, shipping and to a lesser extent,aviation. Some other currencies, notably the Euro have a showing in trade contracts however, the US$ is predominant.
Sale and buy agreements will often impose the trade money of choice as US$ which ultimately leads most non-USA domiciled traders, sellers or buyers into a foreign money transaction and exposure to exchange rate fluctuation.
Business plans, projects and actual transactions which establish profit or transaction margins on an expected exchange rate level can be deteriorated or extinguished where rapid exchange rate fluctuation occurs.
Likely Marine Impact
(where exposed to foreign money or overseas supply)
Hulls – revaluations may be desirable as machinery/parts cost increase.
Cargo – Limits of liability may need review and a watch put on turnover and sendings to ensure a blowout in figures does not give the insured a surprise at time of adjustment.
Liability Limits – may need review.
Claims requiring payment in foreign money will need conversion from A$ with resultant monitory impact to the claims record of the insured. The substitute of elements and parts sourced from overseas may attract inflationary influences due to exchange rate fluctuation.
Insurer per risk capacities will often be established on an annual basis following renewal of treaty reinsurance. Rapid and meaningful variations in exchange rates can rule to short term capacity constraints on risks with large limits or sums insured in foreign money.
Where rapid and meaningful exchange rate variations occur, care should be taken to precisely estimate and react to any negative impact on insurance coverage.
Disclaimer: This bulletin is for information purposes only and is not legal advice.