Sanctions disrupt global trade and complicate business operations. They limit access to markets, drive up costs, and create compliance challenges. For businesses, this means increased reliance on trade credit insurance and political risk insurance to manage uncertainties. Here’s what you need to know:
- Sanctions Impact: They halt trade flows, restrict financial transactions, and create legal risks for businesses and insurers alike. Example: Russia’s removal from SWIFT in 2022.
- Trade Credit Insurance: Protects businesses from buyer payment defaults due to insolvency or political events. Coverage adjustments or withdrawals are common in sanctioned regions.
- Political Risk Insurance: Shields against losses from political instability, government actions, or sanctions. Demand is growing as global risks increase.
- Compliance Challenges: Insurers and businesses must navigate complex, evolving sanctions laws. Non-compliance can lead to fines, reputational damage, and operational delays.
- Mitigation Strategies: Customizing policies, leveraging global insurance networks, and conducting regular risk assessments are key to maintaining coverage during sanctions.
Sanctions create a volatile environment for trade. Businesses must prioritize compliance, risk management, and tailored insurance solutions to remain resilient.
Sanctions in Trade Finance Masterclass: Impact on Trade Finance Products
How Sanctions Affect Trade Credit Insurance Policies
Sanctions bring about swift and significant changes to trade credit insurance policies. Insurers must quickly adjust their coverage, terms, and operations to align with new restrictions while managing the ripple effects across their portfolios. This creates a challenging environment, as insurers face risks not only from their own operations but also from those of their clients. These rapid adjustments increase business risks and compliance demands in an already complex landscape.
Coverage Reduction or Withdrawal
One of the immediate impacts of sanctions is the adjustment or withdrawal of coverage for affected regions and entities. As geopolitical tensions rise, insurers often take decisive action. During the Russia-Ukraine conflict, for example, Nick Robson, global leader for credit specialties at Marsh, noted:
"In this last week, trade credit insurers will have paused supporting new risk for Ukraine and Russia".
Similarly, major insurers like Euler Hermes responded by adjusting their strategies. They stated:
"Given the current context and the strong uncertainty about what will happen next, we are adjusting our underwriting strategy to the gravity and the emergency of the situation".
In practice, this means insurers may stop supporting new business, suspend existing policies in sanctioned regions, and include exclusionary clauses in their contracts. In some cases, they may even seek licenses from the Office of Foreign Assets Control (OFAC) to navigate specific restrictions.
The financial impact of these measures is substantial. Trade credit insurance typically covers 75% to 95% of outstanding debt, providing a crucial safety net for businesses. But when sanctions disrupt this coverage, companies find themselves exposed to greater financial risks.
Legal and Financial Risks for Businesses
When insurers withdraw or limit coverage due to sanctions, businesses face immediate legal and financial challenges. Sanctions often lead to contract disputes and legal issues across multiple jurisdictions, further complicating matters.
The financial strain can be significant. For instance, in 2019, late payment debt for UK small and medium-sized enterprises (SMEs) totaled $29.1 billion, with over half of SMEs affected by overdue payments. Without trade credit insurance, businesses lose a key layer of protection against payment defaults, leaving them vulnerable to cash flow disruptions.
Sanctions that block payments from customers exacerbate the problem. Victor Adesanya, Vice President of Insurance, highlighted this issue:
"Russian companies may fail to transfer funds to foreign suppliers as a result of economic sanctions imposed on them".
Such scenarios can trigger a chain reaction, leading to payment defaults and, in some cases, business failures. Approximately one-quarter of company failures are linked to payment defaults. On top of this, businesses must invest heavily in compliance measures – such as enhanced due diligence, legal counsel, and new systems – to navigate the sanctions landscape.
Compliance Challenges for Insurers
For insurers, the compliance hurdles are especially complex. They must keep up with rapidly changing sanctions while managing their own operations and their clients’ exposures. David Wolff, a partner at Crowell & Moring, explains:
"Insurers manage indirect exposures with less comprehensive information than their clients."
To avoid transacting with sanctioned parties, insurers rely on screening processes, even though OFAC does not explicitly require it. Wolff adds:
"The only practical way to ensure you do not transact with a sanctioned party is to conduct screening".
This screening isn’t a one-time task – it happens at multiple stages, including policy issuance, renewal, amendments, claims, and whenever sanctions lists are updated. The three major insurance groups that dominate over 85% of the global credit insurance market must implement these processes across vast portfolios.
Crafting policy language that complies with sanctions laws adds another layer of complexity. OFAC advises insurers to include clauses that exclude coverage for risks violating U.S. sanctions laws. For example, some policies use broad language like:
"This policy is either suspended or excluded concerning any risks that expose the insurer or reinsurer or broker to sanctions risk".
Claims processing becomes even more challenging when determining whether counterparties have violated sanctions. Insurers are encouraged to contact OFAC directly for clarification, which can delay claims resolution.
Additionally, the concept of strict liability adds pressure. OFAC can impose civil penalties for sanctions violations, even if they occur unintentionally. The fast-changing nature of sanctions compounds these challenges. For instance, in November 2024, OFAC updated several insurance-related FAQs to provide new guidance. Insurers must continuously monitor these updates to maintain compliance while ensuring operational efficiency.
Political Risk Coverage and Risk Assessment Methods
When sanctions disrupt traditional trade credit insurance, businesses must adopt strong strategies to navigate political risks and maintain reliable coverage. Political risk insurance and detailed risk assessment methods are crucial for operating in uncertain markets and reducing the impact of government actions.
Political Risk Insurance in Sanctioned Markets
Political risk insurance provides a specialized safety net that extends beyond standard trade credit coverage, offering protection in regions prone to instability. This type of insurance shields businesses from losses caused by government actions, political violence, and economic disruptions. It typically covers four main areas: expropriation (government seizure of assets), transfer and conversion restrictions (hindering currency transfers), political violence (such as war or civil unrest), and breach of contract by government entities. Unlike traditional buyer-default protection, this coverage addresses a wider array of risks.
For businesses operating in politically unstable or sanctioned regions, political risk insurance safeguards investments, income streams, physical assets, and property. It also allows companies to offer competitive credit terms to international clients, fostering growth in challenging markets. This insurance works hand-in-hand with robust, country-specific risk assessments to provide comprehensive protection.
Country-Specific Risk Analysis and Monitoring
Managing political risk effectively requires ongoing, detailed analysis of each market where a business operates or plans to expand. This begins with evaluating the company’s operations and key market factors while thoroughly examining the political, economic, legal, and regulatory landscape of each country. Recent enforcement actions highlight the importance of this approach. U.S. Deputy Attorney General Lisa O. Monaco emphasized:
"Companies are on the front lines of today’s geopolitical and national security challenges".
Collecting data, engaging with stakeholders, and documenting risks – along with their potential impact and likelihood – are essential steps for strengthening due diligence. These efforts also support the underwriting process for insurance. Continuous monitoring helps businesses stay ahead of risks, ensuring proactive management rather than reactive responses.
Regular Due Diligence for Businesses
Consistent due diligence is a cornerstone of political risk management, especially in sanctioned or rapidly changing markets. This process should start with thorough onboarding that combines financial reviews and sanctions screening. Real-time monitoring systems are essential for tracking financial health, market trends, and sanctions list updates for both current and potential third parties.
Given the financial stakes, proactive due diligence allows companies to diversify their risk exposure by setting limits for individual buyers and industries. It also ensures businesses are prepared with contingency plans, such as debt recovery processes or legal support. Because sanctions compliance can be complex, many companies turn to expert advisors to fine-tune their compliance programs. This comprehensive approach ensures that businesses can maintain insurance coverage even in the face of sanctions-related challenges.
To strengthen protection, partnering with specialized providers like Accounts Receivable Insurance can be invaluable. These providers offer customized political risk coverage, access to a global network of credit insurance carriers, and tailored risk assessment services. With these tools, businesses can remain resilient and adaptable, even in the most challenging markets.
How to Maintain Trade Credit Insurance During Sanctions
Navigating trade credit insurance during sanctions can be tricky, but there are practical ways to keep your coverage intact. The key lies in collaborating with experts who can craft solutions tailored to your needs. Here are three strategies to help you maintain coverage during such disruptions.
Policy Customization and Tailored Endorsements
One of the most effective ways to sustain coverage during sanctions is by working with your insurer to create customized policies that align with your specific risk profile. Instead of sticking to standard coverage, you can design a policy that directly addresses the risks you face, including political challenges like currency inconvertibility, contract frustration, or confiscation.
For instance, you might choose to insure only your most critical buyers or transactions. These custom policies go beyond commercial risks and tackle political uncertainties that sanctions often bring. They also allow you to decide which risks – political, commercial, or both – you want to cover.
"A trade credit insurer will always investigate your particular circumstances and wishes. The result is a tailor made policy at a corresponding affordable premium."
This approach ensures you’re getting exactly the protection you need. For multinational companies, centralized agreements and local support can help maintain consistent coverage across borders. Specialized providers often offer centralized negotiation processes, making it easier to manage your policies and keep them in force.
Leveraging a Global Network of Credit Insurance Carriers
When traditional coverage options are disrupted by sanctions, tapping into a global network of credit insurance carriers can be a game-changer. These networks provide local market expertise, insights into payment practices, and a clearer understanding of geopolitical risks – resources that a single carrier may not offer. For multinational businesses, these networks streamline the process of evaluating global credit and offer alternative coverage options when sanctions create uncertainty.
This strategy proved invaluable for Ronald A. Chisholm Limited during the Russian embargo. Despite the blockade on their meat shipment, their trade credit insurance policy, which included political risk coverage through a carrier network, allowed them to recover an eight-figure sum.
Companies like Genetec have also benefited from these networks. Alain Côté, Genetec’s Chief Financial Officer, highlights how this approach has expanded their business capabilities:
"Our internal credit staff uses that [credit insurance] framework to evaluate credit requests in a way that wouldn’t be available to us on our own. We can expand our business to smaller customers and customers in little-known markets and make credit decisions rapidly and confidently."
By combining these networks with proactive risk management, businesses can maintain strong and flexible coverage even in challenging markets.
Pre-Claim Interventions and Risk Reviews
Proactive risk management is another critical step in maintaining trade credit insurance. Regularly reviewing risks and acting early can prevent coverage disruptions. Credit insurers often provide early warning systems to alert you to changes in your customers’ risk profiles. Treat your insurer as a partner by promptly sharing updates about any shifts in risk. This collaboration ensures both you and your insurer have the latest information for smarter decision-making.
Insurers can also provide real-time analyses of country, sector, and company credit risks – an essential feature in fast-changing, sanctioned markets. By leveraging this intelligence, you can adjust your policies as geopolitical risks evolve. For example, notifying your insurer about overdue payments or shifts in customer behavior can trigger early interventions, preventing small problems from escalating.
Specialized providers like Accounts Receivable Insurance add another layer of support. They offer tailored risk assessments, political risk coverage, and access to global carrier networks, helping businesses maintain resilient insurance coverage even in the face of sanctions.
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Compliance, Claims, and Policy Management Best Practices
Navigating trade credit insurance in the context of sanctions requires a sharp focus on compliance, streamlined claims processes, and diligent policy management. Missteps in handling sanctions can result in hefty fines, damage to your reputation, or even legal consequences. Below, we’ll cover best practices for staying compliant, managing claims effectively, and ensuring smooth policy renewals.
Staying Compliant with Changing Sanctions
Sanctions regulations differ widely across regions like the U.S., EU, and UK, making compliance a challenging task. To stay ahead, companies should establish a strong compliance framework, regularly reassess risk strategies, and create a dedicated sanctions team. Collaborating with third-party compliance providers that offer advanced analytics and real-time sanctions screening can also be a game-changer.
Internal training programs and clear documentation protocols are essential for equipping compliance teams to handle evolving risks. Automated screening tools can further assist by flagging potential issues early and helping companies adapt to regulatory changes, while minimizing the risk of secondary sanctions.
Efficient Claims Management and Documentation
When sanctions disrupt business operations, an efficient claims process becomes critical. Take the MT BLUE case from December 2023 as an example: reports revealed that the vessel manipulated its location data to hide a ship-to-ship transfer involving Iranian-origin crude oil. This led multiple insurers to cancel policies under sanctions exclusion clauses.
This case underscores the importance of maintaining accurate shipping records. Companies should conduct thorough due diligence to ensure that shipping documents clearly show the origin and destination of goods. If a buyer defaults on payment terms, it’s essential to adhere to contractual requirements and document any political or regulatory factors that contributed to the situation.
Renewal and Endorsement Support for Policy Continuity
Once claims are addressed, ensuring uninterrupted policy coverage is crucial – especially in regions affected by sanctions. Engaging in proactive communication with insurers can help prevent coverage gaps. By working closely with credit insurance brokers, businesses can explore enhanced coverage options, as brokers often pre-vet claims and negotiate renewals that align with current risks.
Consider broadening your coverage to include endorsements for risks like political violence, forced abandonment, embargoes, and sanctions. Conducting research on potential business partners can also provide valuable insights, helping you secure better renewal terms and premiums. Specialized providers, such as Accounts Receivable Insurance, offer tailored endorsements and access to a global network of credit insurance carriers, ensuring policy continuity even in volatile geopolitical climates.
The key to navigating these challenges is treating your insurer as a partner rather than just a service provider. Open communication and proactive risk management lay the groundwork for maintaining reliable coverage, even in the face of sanctions-related uncertainties.
Conclusion and Key Takeaways
Sanctions have a way of shaking up global trade almost instantly, stopping trade flows in their tracks and creating financial penalties and market instability that ripple across industries. To navigate these challenges, preparation isn’t optional – it’s essential.
The numbers paint a stark picture. In 2023, the U.S. Office of Foreign Assets Control (OFAC) handed out $1.54 billion in fines to organizations that failed to comply with sanctions. Trade between Russia and the United States dropped by a staggering 86% in the first 11 months of 2023 compared to 2021. Meanwhile, the European Union saw its imports of Russian crude oil fall by over 90% following the invasion of Ukraine. These statistics highlight why having strong compliance and risk management strategies is no longer a "nice to have" – it’s a necessity.
The organizations that fare best treat sanctions compliance as an ongoing process, not a one-time task. This means incorporating tools like automated screening, maintaining detailed records, and providing continuous training for their teams. A risk-based approach is also key – this involves allocating resources where they’re needed most, based on a careful evaluation of business activities, geographic exposure, and relationships with third parties.
Customizing policies to fit sanctioned environments is another critical step. For instance, working with providers like Accounts Receivable Insurance allows businesses to secure tailored endorsements that address specific sanctions-related risks. These partnerships also tap into a global network of credit insurance carriers, helping businesses maintain coverage even when traditional markets become off-limits. This strategy is vital, particularly when accounts receivable often represent about 40% of a company’s assets. Considering that one in ten invoices ends up delinquent, protecting this asset becomes even more crucial.
Remaining compliant requires constant attention. As Cristian deRitis, Managing Director and Deputy Chief Economist at Moody’s Analytics, explains:
"The financial, reputational and operational risks of sanctions violations demand a proactive, sophisticated approach to compliance".
For global companies, staying ahead means regularly updating their political risk profiles and understanding the full scope of their supply chains. Sanctions compliance isn’t just about immediate customers and suppliers – it’s about ensuring every link in the chain is secure to avoid costly violations.
FAQs
How can businesses stay compliant with changing sanctions while protecting their trade credit insurance coverage?
Building a Strong Compliance Program for Trade Credit Insurance
To protect your trade credit insurance and stay aligned with changing sanctions, having a solid compliance program is a must. This involves a few key steps:
- Regularly screen transactions and customers: Cross-check against updated sanctions lists to avoid potential violations.
- Designate a compliance officer: Task someone with overseeing compliance efforts and ensuring all protocols are followed.
- Conduct frequent risk assessments: Identify and address potential issues before they escalate.
Keeping up with regulatory updates is just as important. Make sure your team is equipped with ongoing training and stays informed about any changes. By fostering collaboration between your legal, compliance, and operational teams, you can tackle risks head-on, maintain compliance, and ensure your insurance coverage remains uninterrupted.
How can businesses adapt their trade credit insurance policies to manage risks in regions affected by sanctions?
Businesses operating in sanctioned regions can shape their trade credit insurance policies to include coverage for political risks like government expropriation, currency restrictions, and trade embargoes. These adjustments help safeguard against the uncertainties that come with political and economic instability in such areas.
Beyond political risks, companies can fine-tune their policies to address challenges like non-payment caused by sanctions, supply chain disruptions, or other threats specific to the region. Partnering with an insurer that provides flexible options ensures businesses can protect their financial health, even when navigating unpredictable markets.
How does political risk insurance enhance trade credit insurance for businesses operating in regions under sanctions?
Political risk insurance complements trade credit insurance by shielding businesses from challenges like government actions, political instability, and trade restrictions, especially in regions affected by sanctions. It covers risks such as expropriation, currency inconvertibility, and political violence, offering a safety net against potential financial losses.
When these policies are combined, businesses can protect their cash flow, ensure operations continue smoothly, and engage in international trade with greater confidence – even in unpredictable environments. This combination helps businesses stay steady while managing the uncertainties tied to sanctions and political disruptions.
