Trade Credit Risk
Is Your Trade Protected?
by Daniel Galvao, Financial Products Practice Leader - daniel.galvao@marsh.com
Increased use of foreign suppliers and time-sensitive production is good for freight forwarders, and can mean greater profits for your customers, but only if all goes well. A disruption to the supply chain could cost more than just losses of sales revenues and profits. It could also mean incurring extra operating costs, and subsequently an erosion of stakeholder confidence. Trade disruption insurance is designed to protect companies against the risks they face doing business in a global economy.
When a company utilizes the services of contractors or relocates operations overseas, it exposes its business to a number of vulnerabilities to its supply chain. Sourcing, or outsourcing, in parts of the world that have the potential for natural disaster and political unrest could further expose the future profitability of the company. In addition, if the supply chain depends on a few key suppliers on one end, and/or a few key customers on the other, the company's revenue stream is even more at risk in the event of any disruption to trade as a failure to supply goods or services may result in a potential loss of revenue, contractual penalties, and extra expense.
Responding to Supply Chain Risk
Not all trade disruptions involve physical damage to property. Property, business interruption, contingent business interruption, and marine cargo policies are designed to protect companies against loss due to physical damage, not against loss of revenue or profit. Trade disruption insurance, however, provides coverage that is triggered by an actual insured event, and typically does not require any physical damage to have resulted.
Trade disruption insurance protects a company's revenue stream. It doesn't focus on the value of the goods themselves, but rather on the potential loss of profit caused by a disruption in the supply chain.
The policy can cover a wide range of physical and political events, including:
- Trade embargoes or sanctions;
- Insolvency of named supplier or customer;
- Confiscation of goods or manufacturing facilities;
- Strikes, riots, civil commotion, malicious damage, terrorism, or war;
- Third-party blockades or border closures;
- Deprivation (i.e. inability to export goods as a result of government order);
- Cancellation or revocation of import/export license;
- Emergency closure or blockage of waterways, harbours, airports, roads, or railway lines; and
- Fire, flood storm, earthquake, or volcanic eruption.
The decision to trade proximity for economy in the supply chain comes with risk. With competition tight in the race to market with new goods and to cut costs with just-in-time inventory and outsourcing, it makes sense to consider coverage for trade disruption.
Marsh works with many of the world's leading companies to evaluate the risks associated with their global businesses and to design and implement tailor-made solutions. Working with Marsh's industry specialists, we can offer the vision and proven depth of technical expertise to structure complex and tailored placements. Contact your Marsh broker if you would like to learn more about Trade Credit Insurance.