The Impact of Global Trade on Marine Insurance Premiums
Trade and transit have always been interconnected with one another. Transporting goods from one place to another, especially from one country to another, is a huge part of modern-day trading since globalisation took over the world.
Hence, it is no secret that this intricate web of trade activities is significantly dependent on the safety and security of goods transport and, consequently, on marine insurance policies.
In this blog, we understand the impact of global trade on marine insurance policy, its functionality and premiums.
Impact of Global Trade on Marine Trade Insurance
● Demand Generation
The volume of global trade impacts marine trade insurance. When there is an increase in demand for goods, there is also an increased demand for marine insurance. Since more goods are being shipped across international waters, the need for cargo coverage against risks such as theft, loss, damage and accidents heightens.
Low trade activity due to decreased demand or lack of demand generation will negatively impact the purchase of marine trade insurance policies. Hence, you see an impact on both sides of the scale.
● Cost Fluctuation
The cost of goods being transported heavily influences marine insurance premiums. Global trade is subject to economic cycles of inflation, deflation, depression and recession, as well as changes in exchange rates and commodity prices.
During such economic downturns and cost fluctuations, trade volumes are always on the verge of decreasing, which may lead to lower premiums. On the other hand, when the economy blooms, resulting in increased trade activity, it leads to higher premiums.
● Reduction of Cost
Cost reduction due to the type of travel or place of transit also holds a place in this discussion. When transportation is through risky or difficult routes, the risks and costs are high. On the contrary, countries that provide great trade provisions and infrastructure reduce the cost of transport and risks during transit.
The cost associated with commodity transport has a direct relationship with marine insurance premium rates. High costs and risks attract high premiums, whereas low risks and costs attract lower premiums.
● War Risks
As mentioned above, risks and costs attract high premiums in marine insurance. Global trade routes often pass through regions with varying degrees of instability. There are countries and regions that exhibit a high frequency of unrest and war activities.
War risks, such as piracy, terrorism, armed conflict, malicious attacks and more, are a major concern for marine insurers. If cargo, vessel and hull traverse through these high-risk war zones, the insurer denies marine trade insurance provision due to heightened risks.
● Geopolitical Scenario
Geopolitical tensions between countries, such as trade wars, terrorism issues, diplomatic conflicts and sanctions, disrupt trade between the concerned parties. Uncertainty about trade and diplomatic relations causes turmoil for insurance providers.
In such cases, coverage premiums in marine insurance will rise, or the insurers will deny access to marine trade insurance for these transports.
Factors Affecting Marine Insurance Premiums
● Insurance Coverage
One of the most important factors influencing coverage premiums in marine insurance is the policy’s coverage. The extent and scope of coverage required by businesses significantly affect premiums in marine insurance.
The premium amount is also determined by the type of marine trade insurance you choose to buy. Assess your business needs and buy mindfully.
● Types of Goods
The type of cargo in transit plays a substantial role in determining the premiums. If the goods are perishable, high-value, luxurious, premium or hazardous, the cargo will be associated with higher marine insurance premiums. Conversely, if there is a very low risk associated with goods in transport, the premium will be relatively low.
● Mode of Transport
Marine trade insurance covers multiple modes of transport since it is also transit insurance. The mode of transport, whether it is sea, air, road or rail, will make a lot of difference for the premium amount.
Each mode of transport, combined with the type of goods being transported, is exposed to a certain level of risk. The insurer will leverage these factors to determine the policy’s premium.
● Vessel Details
Large vessels, such as container ships and tankers, attract high premiums. Additionally, older vessels attract higher premiums and newer, well-maintained, low-risk vessels attract lower premiums. Additionally, the cost of the vessel also influences the policy’s premium amount.
Conclusion
The global trade and marine trade insurance landscapes are intertwined, and this is prevalently observed in many influencing situations. The abovementioned factors all play a role in shaping the maritime insurance scenario, especially the marine insurance premium rates and policy demands.
Leading insurance providers like TATA AIG adapt to evolving global trade, ensuring their products remain relevant and they do not experience excessive losses.