How Marine Insurance Aids International Trade

Marine insurance is a positive aid to various business enterprises, importers, exporters and persons engaged in international trade and commerce.

No large-scale enterprise could possibly function had it not been possible to transfer many of its risks to insurers. Vast amount of capital are always at risk and without insurance businessmen would have to put aside some of their capital resources against the possibility of fortuitous losses.

When there is insurance protection the question of keeping aside a portion of capital to meet the unforeseen contingencies would not arise, as insurers would then come forward to indemnify the insured against these losses.

Not only, therefore, is capital safeguarded by insurance, but it is also freed for further development of business and trade.

Those who run businesses may have their own specialties to run their own business or trade, but may be handicapped by their lack of Knowledge of risk management.

Insurance removes the anxiety thus arising by making available its expertise; business efficiency is thereby increased.

Further, the knowledge that the business protected from catastrophe losses will encourage enterprises and lead to the undertaking of ventures which might otherwise have been shelved as too risky for the individual concern to embark upon.

Marine insurance occupies important position in overseas trade and commerce.

As it affords protection against fortuitous losses, it enables all those engaged in overseas trade to venture their capital freely then would otherwise be possible and in this way helps greatly to expand the scope of their operations.

The study of the importance of marine insurance in international trade, particularly to exporters will not possibly be complete unless its importance is visualized from a different angle as well.

In the present day commerce, the banks are largely responsible for financing the overseas trade of the world.

The usual method is for the buyer to forward to the seller of goods a letter of credit drawn on a banking house.

This is a non-negotiable document, being merely an authority from the banker who signs it to the banker or other person to whom it is addressed to honor the draft of the person named in it on production of some other documents that may be required.

This draft is usually in the form of a bill of exchange against the value of each shipment. Provided it is accompanied by other required documents of title to the goods, the bank will be prepared to discount the bill.

Such other required documents to title are:

  1. Bill of exchange.
  2. Bill of leading.
  3. Invoice.
  4. Marine policy.

In this way the seller is put into funds immediately, instead of waiting for some time for a remittance to be received from his customer abroad for the goods shipped.

This system makes it possible for the exporter to use his capital always instead of having it locked up in goods in transit.

The importance of marine insurance in this credit system is such that the goods, as specified in the letter of credit, are insured against marine risks and the policy, along with other documents is lodged with the bank as collateral security.

The advance made by the bank is primarily secured on the goods, and if these are lost or damaged in transit, the security would, but for the insurance, be lost or diminished.

The documents are forwarded to the bank’s branch or agent at destination and are delivered to the buyer against payment of the amount of the draft.

He can then collect his goods from the ship against the bill of lading, and if they are damaged he can claim on the insurers for such damage, where it is recoverable under the terms of the policy.

There is no legal compulsion on a merchant to insure his goods against marine perils, but in practice this must be done, as the bank will insist for it.

Even where a bank does not finance shipments, common prudence calls for marine insurance protection, particularly as the cost is only a fraction of the market value of the goods.