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Insurance plays an important role in world trade. It enables businesses to trade with greater confidence and venture their capital more freely than would otherwise be possible.

Why? Because it provides protection against unforeseen losses. This means businesses can invest in the knowledge that they have financial security even if, due to unexpected circumstances, they can no longer benefit from their assets. An example: banks will not discount a bill of exchange unless the goods are insured. The insurance certificates issued are used by banks as collateral security so they may release funds.

So insurance provides two main benefits. First, increased confidence because risk is transferred. Second, improved access to finance. In the case of Russia and the rest of the FSU, where access to capital is limited, effective utilisation of insurance enhances local companies’ ability to raise capital and thus to compete internationally.

The London insurance markets

London is the centre of the global insurance industry due to high levels of expertise and an innovative approach to insuring a wide variety of risks. The two key markets are: Lloyd’s of London, which is an insurance market, not a single company. Insurance business is underwritten though different syndicates, each offering different types of insurance. Lloyd’s has a worldwide reputation for flexible and innovative underwriting.

If you wish to insure a risk in Lloyds, you must appoint an accredited Lloyd’s broker. The multinational insurance companies, which are individual companies with underwriting offices throughout the world, such as AIG, QBE or ACE. They recognize London as a global financial centre, so base a substantial part of their business here. They have the capacity to underwrite a broad spectrum of risks.

There are of course also insurance companies in the UK who limit their activities to the home market and who promote themselves on the basis of their specialist local knowledge.

Insurance is a highly regulated industry in UK, and companies can insure risks here with confidence. Notwithstanding that, the rating of a particular insurance company is of key interest to potential policyholders. Ratings for insurers are supplied by, in no particular order, AM Best, Standard and Poors, Moody’s and Fitch. The higher the rating, the more secure an insurance company is assessed to be. Ratings are determined by a combination of ability and willingness to pay claims, quality of management and underwriting skills.

Subject to licensing requirements, insurers based in London can meet the insurance requirements of companies from the FSU and also of companies looking to trade into the region. Note however that licensing rules are constantly changing.

How to obtain insurance?

For the most benefit, it is essential to have the right insurance cover in place, with the right insurer. The complexities involved in placing insurance mean it is best to appoint a broker to assist you.

Insurance brokers have a duty of care to their clients, not to the insurer. As London is the centre of the global insurance industry it pays to appoint a London-based broker — he will be able to access all global markets as well as the London market, and will try to obtain the best terms for any particular risk.

Brokers in London are particularly well positioned to place risks linked to the FSU. The London market has been insuring risks in the region for many years, thus accumulating experience and expertise on the region generally, particular aspects and peculiarities of business there, and the regulatory regimes in the various countries.

What types of insurance?

The countries of the FSU are great trading nations, and companies wishing to trade need cost effective financing for their transactions. Insurance facilitates this as it provides security in the event of an unforeseen problem. The two areas of most interest in this context are financial insurances and marine cargo insurance. Financial insurances are widely used by multinationals, corporations, traders and shippers to help access cost effective finance. The risks are underwritten, and the insurances are accepted by the banks as a genuine means of risk transfer. Indeed, the banks will only agree to trade loans and structured finance loans on the basis that the underlying risk is insured.

The two principal types of financial insurances are trade credit insurance and political risk insurance.

Trade credit insurance covers the non-payment by a buyer when credit terms have been extended. Offering credit terms to a buyer is beneficial in terms of winning business, but leads to the risk of the goods being delivered but not paid for.

Insurance cover can be provided for insolvency of the buyer and for “protracted default” — this means prolonged failure to pay for the goods. The insurance can be amended to deal with circumstances where the opposite may happen — money is pre-paid but the goods are not delivered.

Political risk insurance covers the risk of a State, through its actions, frustrating a contract. For example, trade embargos may be imposed. If you are contracting with a State-owned organisation, its contractual performance can also be insured. The political risk insurance market will also provide cover against the seizure of assets such as goods, plant or machinery by governments as a result of confiscation or nationalisation.

The London insurance market is also a world leader in providing insurance cover against the risk of assets being damaged due to an act of terrorism, war or malicious damage. Many of the world’s major banks use the London insurance market to cover such risks when they are providing financing for a project or transaction.

Marine cargo insurance is the other key type of insurance cover for traders. It provides protection in the event that cargo is lost or damaged while in transit. Again, the London market is the worldwide leader in providing competitive insurance of this type.

Particular Factors for FSU Companies

For companies operating in or trading out of Russia and the rest of the FSU, the political risk, trade credit insurance and marine cargo insurance markets in London are easily accessible. Many London insurance brokers have a well-developed network of contacts throughout the FSU.

Companies based in the FSU must have regard to local regulations and how they apply to different classes of business. In some circumstances, a local insurance company may by law need to be involved. This does not however presently apply to political risk, trade credit or marine cargo insurance.

A vital point is that a company wanting to insure a risk has to provide insurers the fullest possible information on the project or transaction, and the proposed risk. The insurers will expect to see numerous documents, including copies of contracts.

They will expect the company asking for the insurance to have carried out its own due diligence on the proposed counterparty or to provide a breakdown of prior trading history with that counterparty. Full disclosure of material facts is required, so that the insurer is able to carry out a proper assessment of the risk and set an appropriate premium. Again, disclosure requirements are something your broker can advise further on.

Conclusion

The London insurance market has the expertise, experience and appetite to assist in the development of business for banks, traders and companies operating within Russia and the rest of the FSU and, as those companies become more international in their outlook, will have an increasingly important role to play.

JAMES COOPER, Tysers — Tysers is a leading specialist in the area of Political Risk and Trade Finance Insurance and other complementary insurance products on an international basis. Tysers prides itself on finding innovative and flexible solutions, in order to facilitate clients’ business.

Tagged as: Insurance