Trade winds

Russell Group’s Suki Basi outlines the important role of trade in global economics, urging the (re)insurance industry to look more closely at its exposures.

Trade, which is the heartbeat of the global economy, has been massively disrupted by Covid-19. In the earlier part of the year, trade was thrown into disarray, as countries across the globe imposed lockdowns, which meant that more goods were freighted as air cargo.

Therefore, it is no surprise that the World Trade Organisation’s ‘Goods Barometer’, which measures real-time information on the trajectory of world merchandise trade, calculated an index score of 87.6. This is far below the score of 100 (which means that trade is on trend).

Our analysis shows that Covid-19 will wipe $3tn from global goods trade in 2020 compared with 2019 levels. Based on shipping and aircraft movements, we expect goods trade to be $7.45tn in the first half of 2020 and $8.55tn in the remaining six months of 2020.

“The pandemic has illustrated the extent to which trade has been disrupted and how that has translated into economic and (re)insurance losses”

Despite the crucial role that trade plays in the global economy, its relationship to exposure is largely ignored in traditional (re)insurance analysis.

The pandemic has illustrated the extent to which trade has been disrupted and how that has translated into economic and (re)insurance losses. In fact, as more trade was disrupted, it led to more uncertainty in decision making, which led to further turmoil across the trading landscape, driving a need to understand trade better.

The pandemic is just one of the variety of connected risks, including geopolitical, climate, economic, societal and technology risks which can throw trade into disorder and will continue to cause disruption in the future, until society implements the policies which can address these risks, and enable sustainable growth.

By goods trade, what I am referring to is the flow of goods between countries over traditional transportation modes such as aviation, shipping, and land-based transport. Linking this trade to export/import companies, enables granular company trade exposure to be calculated at country, region, airport/port, aircraft/ship, operator and goods level. This trade exposure will interconnect across several insurance classes including static and transit cargo, credit, business interruption and supplychain classes, but will enable (re)insurers to understand the exposure correlations between these classes.

The true benefit of analysing trade in this way is that when an event or “shock” occurs, the wider implications of that incident can be analysed and assessed. For example, the pandemic negatively impacted trade, and caused numerous unpaid bills, with “knock-on” credit and BI claims. This left corporates and their (re)insurers not knowing the resultant exposures from disruption within their own supply and service chains.

Such an approach, as outlined in this article, calls not only on a greater use of big data but also requires corporates and (re)insurers to monitor and reassess their exposures, if the data changes. If this feedback loop is maintained, then both should be able to pinpoint what their real-time exposure is, make better decisions and operate more sustainable businesses. 

Having now identified the problem concerning the absence of trade in (re)insurance analysis, in out next article, I will seek to highlight how our solution will help corporates and (re)insurers alike.