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Maritime Insurance – Exchange Rates Insurance News

Large amounts of international trade and many limits and sums insured for marine insurance contracts are transacted in a currency other than the Australian dollar (A$).

Fluctuating exchange rates between currencies are common and most entities exposed to this area implement forms of hedging or risk management to reduce the possible impact on their business.

When rapid and significant variations occur together, the best hedging and risk management plans may not be enough to completely eliminate the impact on a business.

This newsletter highlights some of the exchange rate issues that can affect marine insurance coverage.

Currency and Trade

The currency of the United States of America (US$) is recognized as the international currency of trade, shipping and, to a lesser extent, aviation. Some other currencies, notably the euro, are shown in business contracts, however the US dollar is predominant.

Buy and sell agreements will often impose the trading currency of choice as US dollars, eventually leading most non-US domiciled traders, sellers, or buyers into a foreign currency transaction and exposure to the exchange rate fluctuation.

Business plans, projects and actual transactions that set profits or transaction margins at an expected exchange rate level can be eroded or extinguished when rapid exchange rate fluctuation occurs.

Probable marine impact

(when exposed to foreign currency or foreign supply)

Hulls – Revaluations may be desirable as machinery/parts costs increase.

Freight: Liability limits may need to be reviewed and turnover and shipments monitored to ensure that an explosion in numbers does not surprise the insured at the time of adjustment.

Limits of liability: may need review.

Impact of claims

Claims requiring payment in foreign currency will require A$ conversion with resulting monitoring impact on the insured’s claims record. The replacement of components and parts from abroad can attract inflationary influences due to the fluctuation of the exchange rate.

assured capacity

The insurer’s risk capacities will often be established annually after the renewal of the reinsurance contract. Rapid and significant changes in exchange rates can lead to short-term capacity constraints on risks with large limits or sums insured in foreign currency.

When rapid and significant exchange rate fluctuations occur, care must be taken to accurately assess and react to any adverse impact on insurance coverage.

Disclaimer: This newsletter is for informational purposes only and is not legal advice.

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