Business interruption, trade credit and political risk high on Asia’s agenda

When a state-owned energy company in Indonesia defaulted on its payment obligations, proceedings were initiated against the government under the guarantee issued by the Ministry of Finance.

The arbitration tribunal found in favour of the insured, but the government’s failure to pay this award meant claims were filed with the Overseas Private Investment Corporation and private-market insurers. The insured then received full payment of $290m.

This is one of the complex political-risk insurance claims outlined in Marsh’s latest Asia Directors’ Series publication. An in-depth look at managing specialty insurance claims also examines business interruption and trade-credit claims.

Marsh Asia-Pacific chief executive Martin South (pictured) said that these classes of insurance presented numerous challenges for any business trying to recover from a loss. “Whether it’s an earthquake in Japan, a major customer default, or civil unrest in the Middle East, businesses need to be fully prepared upfront so they can navigate the claims process with confidence,” South said. “While the process can be complex and daunting, companies can gain a significant advantage by taking the time to understand these specialty claims areas.”

Determining the insurable value for loss of income can be a difficult and intricate process when claiming under a business interruption policy, the report advises. “Fires, storms, floods, machinery breakdowns, power outages, and product recalls are just some of the events that have the capacity to severely interrupt an organisation’s ability to trade, putting it at risk of significant financial loss and potential failure,” it says. “It is common for businesses to insure their assets to help reduce the financial hardship of repairs or replacement if damage should occur.

“However, it is sometimes overlooked that those same assets produce income that, if not insured, can cause crippling losses and additional costs after a disruptive event.”

The report also provides guidance on navigating trade-credit claims that arise when customers default on their payment obligations, and political-risk claims, which occur when business assets are expropriated, nationalised or fall victim to political violence. It states that establishing robust credit-risk governance procedures and adequate insurance solutions to avoid the risk of buyer default was becoming a priority for many organisations.

“Companies throughout Asia are increasingly turning to trade credit insurance, [but] to get the most out of a trade credit insurance policy, it is important to have a deep understanding of the policy triggers,” the report advises.

South said that political-risk insurance had become increasingly vital as a risk-management instrument for businesses investing or operating in politically unstable countries, particularly emerging markets. “By covering possible losses resulting from expropriation, currency inconvertibility, and political violence, political-risk insurance can reduce value erosion caused by sudden disruptions, allowing more focus to be placed on measures to increase profit potential,” he said.