Political risk and trade credit

In this chapter of our Annual Insurance Review 2019, we look at the main developments in 2018 and expected issues in 2019 for political risk and trade credit.

Key developments in 2018

UK trade credit insurers saw a string of significant domestic bankruptcies, while also preparing for the economic impact of Brexit.

In the UK, insolvencies hit a six-year high – a trend not reflected in the Eurozone. The year stared with Carillion’s insolvency, which caused a ripple effect in the construction industry. The retail sector was also badly hit in the UK. Big names that collapsed included Toys R Us, Maplin, House of Fraser and Evans Cycles – the latter two both sold using the pre-pack administration procedure.

On the international front, China was ranked as experiencing the highest increase in the number of insolvencies worldwide, and this will inevitably start to have an impact on other Asian economies that depend on China.

These insolvencies are a timely reminder to be cautious of the perceived protection to be obtained from retention of title clause in underlying contracts. Even if they are valid (noting challenges posed by the nature of the goods, jurisdiction and rules of a particular administration regime), insureds and insurers both need to be aware that action needs to be taken fast if they are to be effective, and this could have implications for the co-operation, monitoring/reporting and mitigation of loss provisions in policies.

Although the Brexit negotiations inevitability lead to considerations about our own national interest, and while the drivers behind the Brexit vote are commonly seen as nationalistic, the butterfly effect of Brexit has been seen internationally throughout the course of 2018. Trade credit insurers have been cancelling limits on obligors involved in EU/UK cross-border trade and the weaker pound has caused issues in surprising sectors like cocoa, which, in turn, has had an impact on the developing nations that depend on those commodities, such as Côte d’Ivoire.

What to look out for in 2019

From a political risk perspective, it seems likely that the trend towards increased protectionism will continue throughout 2019, leading to concerns over trade wars and sanctions.

The escalating US/China trade war and the fall-out from it could present one of the biggest threats to the global economy in 2019, unless the G20 meeting in December 2018 can quell the situation. Trump’s tariffs and quotas have targeted not just China, but also sectors such as aluminium and steel – involving traditional allies, the EU and Canada, in the fray. In 2018 alone, China’s retaliation involved taxes on US agricultural and industrial products, soya beans, pork, cotton, aeroplanes, cars and steel pipes, and many commentators argue that China has the ability to withstand US tariffs. The effect has been wide-ranging with impacts on Chinese manufacturing, US tech stocks and risk to the slow recovery of the international shipping industry.

From a policy perspective, the imposition of export and import taxes has long been a matter of debate for political risk cover, as taxation in itself is not a political risk. However, if it is to be used for targeted purposes, or at levels that deprive an investor of the total benefit of the investment, the arguments may become less black and white, and insureds and insurers need to work together to understand how the new face of world trade could affect foreign investments.

Authored by Geraldine Bourke.

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