The Trump administration’s imposition of tariffs and the threat of an impending trade war with China could eventually result in reduced capacity and higher rates in the political risk and trade credit insurance market. But although there is already some evidence of increased submissions by policyholders, it is too soon to see how the situation will develop, experts say. “What I think everyone is potentially worried about is escalation into a full-scale trade war where doors shut,” said Andrew Grant, a London-based partner with law firm Clyde & Co, although the majority view is matters will not reach that point. The situation, though unpredictable, is clearly heating up: The Trump administration imposed tariffs on $34 billion of Chinese product as of Friday. And, as expected, China immediately retaliated, imposing a similar 25% tariff on 545 products, including cars, soybeans and lobsters, that are also worth a total of $34 billion, while charging the U.S. with starting “the largest trade war in economic history.” The Trump administration has also imposed tariffs on foreign steel, aluminum, solar panels and washing machines from countries including Canada, Mexico, the European Union and Japan, but China is of particular concern because of the extent of its trading relationship with the United States. The often-intertwined political risk and trade credit markets are competitive, with plenty of capacity for now, experts say. “The political risk and trade credit market continues to expand,” with more than 60 companies offering coverage and the total number increasing each year, said Daniel Riordan, president of political risk, credit and bond insurance in New York for XL Group Ltd., which does business as XL Catlin. “It continues to be a specialty area that is attractive to private carriers as well as government providers, who are still quite active in the market,” he said. But the current situation could lead to increased rates. “I would definitely look for increased insurance costs across the board for direct foreign investments in countries” where there is trade conflict, said Marc Wagman, New York-based managing director, trade credit and political risk practice group, for Arthur J. Gallagher & Co. “Anytime you’re operating in an environment where the cost of regulatory compliance increases … it’s reasonable to expect there would be inherent increases in the cost of insuring risks across a wide spectrum” because “that just makes insurers nervous,” he said. But the impact in the political risk and trade credit sector, if any, will take time to emerge, say experts. “On the short-term trade side at this point in time, there hasn’t been any change yet in underwriting appetite for risks both foreign and domestic,” said Mr. Wagman. “There’s a real lag in how long this is going to take to cycle through,” he said. “We’re not going to see it until I would say, at the earliest, one year from now.” Mr. Riordan also said steel and aluminum companies “prepurchase supplies six to 12 months in advance, sometimes longer.” “The issue we see now” is the situation “may lead to a change in how U.S. creditors are treated in foreign markets, especially China,” said Clay Sasse, New York-based managing director with Aon P.L.C.’s trade credit practice. “Foreign creditors don’t always have a simple and easy time” of going through other countries’ court systems, he said, and debtors “may feel emboldened” into believing they have more of a home court advantage than they did a year ago. Claims could arise from governments issuing punitive new rules that prevent companies from operating in foreign countries, Mr. Riordan said. Those can often be as equally difficult as tariffs, he said. Meanwhile, submissions are up, say observers. “We have seen some uptick in submission activity, particularly from trading companies and exporters,” said Mr. Riordan. “There’s heighted interest there,” which is normal, he said. “This is front-page news. If you’re on the board of directors of a major trading company or exporter, you’re going to be concerned about it. Your risk management teams should be thinking about it” and assessing the situation, said Mr. Riordan. Evan Freely, New York-based managing director for Marsh L.L.C., who leads its credit specialties practice, said, “Definitely, we’re seeing more submissions,” although “I can’t specifically attribute it to tariffs, because we don’t ask that question per se.” “It’s one of maybe three or four issues driving the increase in applications, especially in those industries affected by this, whose supply chain might include steel or aluminum” or the electronics sector, Mr. Freely said. Other issues of concern, he said, include political issues in Mexico, Turkey and Colombia, North Korea, and Brexit. In addition, U.S. relations with Russia, are a “burning issue that’s always there,” he said, in addition to the unrest in the Middle East. Capacity would lessen before rates go up, Mr. Freely said. “Rates typically go up after the industry collectively takes losses. It would be a capacity issue first and a rates issue second. There’s so much competition here now from an underwriting standpoint that there’s probably less pressure on the rates to go up.” https://www.businessinsurance.com/article/20180710/NEWS06/912322545/Political-risk-trade-credit-insurance-markets-may-hinge-on-Trump-tariffs
