As a number of countries around the world experience political and economic instability, global businesses operating or making investments in those areas need to review their insurance protection and take steps to strengthen risk management programs.
In Venezuela, for example, nearly 50 global businesses reported existing or potential impacts on their financial statements due to hyperinflation. Among risk executives worldwide, currency fluctuations ranked as the 17th most significant risk, according to Aon’s 2015 Global Risk Management Survey.
Risk management tools and approaches related to dramatic potential currency fluctuations may include: political risk insurance, trade credit coverage, currency hedges and forward contracts, and contractual risk transfer, including stipulating that payments and receivables be denominated in hard currencies.
Businesses also should review all domestic and international property insurance policies, related business interruption coverages, and trade disruption insurance to learn whether and how their programs might respond to losses in countries with rapid currency devaluation or hyperinflation.
With respect to claims for physical damage and business interruption, hyperinflation and dramatic currency devaluation pose key challenges related to the reported values in an insurance policy. Even when firms believe their reported values are accurate, any claim may still result in significant coverage shortfalls due to margin clauses, coinsurance or sublimits.
Compliance with local insurance laws typically requires that policies be issued by legally admitted insurance carriers, which generally provide coverage in local currency. Consequently, values should be reviewed at least annually at policy renewal; businesses should also work with their insurance brokers to see if they can have language inserted into their policies for inflation-related adjustments in property and business interruption values and coverage.
Global insurance programs may provide some relief in these circumstances, but policy language should be checked to see how multiple policies will respond to a loss in any countries with hyperinflation or significant currency devaluation. Notably, many policies issued outside the U.S. have a coinsurance provision that applies to claims involving under-reported values. In these cases, the insured must pay for the shortfall in coverage. Master policies under global programs often are structured to address such deficiencies, but have restrictions that could leave a business significantly underinsured.
Businesses should be especially wary when operating in countries where governmental entities peg currency exchange rates to a different standard than U.S. published rates, and to consider carefully the potential issues they may face in the event of a property claim.
Chris Dineen and Carlos Moran are directors in Aon’s Claim Preparation, Property Claims Advocacy and Valuations group, which provides global expertise in claims advocacy, claims preparation, and pre-loss asset and business interruption valuation.