Cross-Border Trade and Insurance

In December 2023, Australia and the United Arab Emirates (‘UAE’) jointly announced the commencement of negotiations for a Comprehensive Economic Partnership Agreement. ^[1]

This bilateral free-trade agreement will open new opportunities for Australian businesses to trade in sectors, including food, construction, minerals, resources, engineering, education, agribusiness, and health in the Middle East. Its successful implementation will add to Australia’s 18 existing free-trade agreements (‘FTA’) with jurisdictions across various geographical regions, including Asia-Pacific, America and Europe.

Inevitably, there will be risks involved with trading overseas, and these may differ depending on the receiving jurisdiction. Naturally, businesses will consider insurance as a key risk management tool in such situations. This article provides an overview of the key risk and common coverages for trade-related insurance on the global market.

Trade-related risks

As with any type of trade, there is always a risk that one party to the transaction may fail to fulfil their obligation to deliver and/or provide agreed payment. Such risk is exacerbated when importers and exporters are based in different jurisdictions with different laws and regulations regarding contractual disputes.

Similarly, where imported products result in personal injuries and/or property damages, it may be difficult for consumers to reach the overseas manufacturers due to physical distance and/or jurisdictional unfamiliarity. This puts local importers at risk of legal actions instead.

Moreover, the importing or exporting of goods overseas by sea, air or road is subject to greater risks of unforeseen weather or man-caused events, which may result in financial losses.

Political risks represent another key component of uncertainties when trading overseas, especially in jurisdictions where the political landscape is less stable. Trade activities may be impacted by political events and/or policies such as import or export embargoes, political unrest and property confiscation.

Trade-related insurance coverages

In response to these unique risks associated with cross-border trade, insurers have designed various products that provide coverage to protect those engaging in trade. These include, but are not limited to:

Trade credit insurance involves importers guaranteeing to exporters that they will pay in full when contract conditions have been met. If the former fails to fulfil the contract and defaults on agreed payments, the latter would be entitled to make claims on its trade credit insurance policy. Often in international trade, another form of protection is a letter of credit. This is provided as a form of bank guarantee that the purchaser’s payment to the seller will occur on time and for the specified amount agreed. With this in place, when the purchaser experiences difficulties in meeting financial commitments, the bank will step in to close the gap on any unpaid amounts. However, letters of credit are generally more limited in scope than trade credit insurance, as the former focuses on a single buyer and transaction.
Product liability insurance is aimed at protecting businesses from financial losses associated with personal injuries and/or property damages caused by their products sold. Australian businesses may often import goods from overseas markets to distribute to local consumers. The importing and/or wholesaling businesses are often not directly involved with the manufacturing process, especially where those take place in foreign jurisdictions. However, such detachment does not necessarily preclude them from liability. This is because under the Australian Consumer Law (‘ACL’), importers and/or wholesalers may often bear responsibility and legal liability for products distributed to consumers. In fact, consumers can bring legal action against both the supplier in Australia (s 259 of the ACL), the manufacturer (s 271 of the ACL) or both. ^[2] The local supplier is often more likely to be sued than its overseas trade partners.
Air and/or marine cargo insurance covers goods whilst being exported from, imported to and in transit within countries, by sea, air, road and/or rail as part of cross-border trade. These policies aim to protect businesses from financial losses due to unforeseen events such as storms, collisions and piracy.
Political risk insurance provides coverage against losses that arise from political perils, such as currency inconvertibility with non-transfer of funds, confiscation of monies and/or items of trade and contract frustration. This type of policy is beneficial for businesses that engage in cross-border trade where the counterparty is within a jurisdiction that has less developed political and/or legal systems, such as emerging markets.

Tariffs and recent trade policies

Cross-border trade is inevitably impacted by policies such as tariffs. When goods arrive at the importing country’s border, its government will collect tariffs based on the type and amount of commodities being traded and the country of origin.

Recently, the United States have imposed new and additional tariffs, including a 10% baseline tariff across its global trade partners, in addition to higher reciprocal tariffs against specific commodities and/or countries. For instance, steel, aluminium, automobiles and certain parts imported into the United States are subject to 25% tariffs for UK-origin products and 50% for all other countries. ^[3]

These trade policies are subject to ongoing changes as the Trump administration enters into various discussions and negotiations with its counterparties, and court challenges are also taking place to determine the legality of these polices. For instance, the United States Court of Appeals for the Federal Circuit held that “fentanyl” and reciprocal tariffs exceed President Trump’s authority under the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.),^[4] which is opened for further appeal by the government.

Albeit such ongoing change and movements, it is nonetheless worth reflecting on the implications of trade policies on the insurance world.

Should the tariffs cause supply chain disruptions and/or shortages in raw materials such as steel, lumber and auto parts in certain parts of the world, the property and motor books may see increased repair and replacement costs, which also compounds on existing labour shortage issues. ^[5]

In response, insurers may be pressured to raise premiums or tighten underwriting standards to manage heightened risks, and thereby may push consumers towards cheaper and less comprehensive coverage. That said, the extent of impact will also depend on any retaliatory policies from respective governments and other subsequent developments.

The impacts of uncertain global trade environments may also be felt directly by the trade credit insurance market. Trade credit insurance is designed to protect cash flows in instances of debtor defaults on payments or insolvency. Recent ASIC publications suggest a 43% year-on-year increase in insolvencies, with contributing factors including rising costs, tightening credit conditions and ongoing global uncertainties. ^[6]

This, in turn, translates into potentially higher rates of claim on trade credit and/or business interruption insurance due to tariff-induced disruptions, such as cost increases, delays in shipping and potentially changes in customer behaviour from overseas markets.

Indirectly, financial market volatility and potentially weakening economic conditions will also impact insurers’ investment portfolios, resulting in capital and profit implications. These in turn may trigger reviews of pricing and insurance offerings.

The way forward

In summary, we live in a world that is heavily reliant on multilateral trade and interchange. Such activities inevitably involve risks. Those engaging in cross-border transactions should actively assess their risk management needs through means that include insurance, and proactively assess the impact of various trade policies for their business.